COST  OF  PRODUCTION  AS  A MILK  PRICE 
DETERMINANT 


BT 


HARRY  ALBERT  ROSS 

B.S.  University  of  Illinois,  1917 


THESIS 

SUBMITTED  IN  PARTIAL  FULFILLMENT  OF  THE  REQUIREMENTS 
FOR  THE  DEGREE  OF  MASTER  OF  SCIENCE  IN  ECONOMICS 
IN  THE  GRADUATE  SCHOOL  OF  THE  UNIVERSITY 
OF  ILLINOIS,  1922 


URBANA,  ILLINOIS 


■a. 

-j 

w 
1 1 \> 
Q. 
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I92Z 

UNIVERSITY  OF  ILLINOIS 

THE  GRADUATE  SCHOOL 


JA_ 


192 


1 HEREBY  RECOMMEND  THAT  THE  THESIS  PREPARED  UNDER  MY 

’ 1/-  ^ 


SUPERVISION  BY  rtt^ 


ENTITLED^ 


BE  ACCEPTED  AS  FULFILLING  THIS  PART  OF  THE  REQUIREMENTS  FOR 


Recommendation  concurred  in'* * 


Committee 


on 


Final  Examination* 


•Required  for  doctor’s  degree  but  not  for  master's 


* - 3 >•  A 

A-'s 


. 


■ 


'■  ■■ • 


CONTENTS 


CHAPTER  ' PAGE 

I.  INTRODUCTION l 


Dairying  Under  War-time  Conditions,  1;  The  Chicago  Dairy 
District,  2;  Dairymen's  Organizations,  3;  Statement  of 
the  Problem,  5. 


II.  DEVELOPMENT  OF  TEE  COST  FORMULA 11 

Events  Preceding  the  Period  of  Price  Fixing,  11;  The 
Chicago  Milk  Inquiry,  17;  Report  of  the  Milk  Commis- 
sion, 21;  Adoption  of  the  Modified  Formula,  27. 

Ill .  THE  DIFFERENCE  BETWEEN  THE  REAL  AND  THE  FORMULA  COST  OF 

PRODUCING  MILE - 32 

Individual  Costs  Differ  from  the  Average  Cost,  33;  The 
Proportion  of  Purchased  and  Farm-grown  Concentrates  Fed 
to  Dairy  Cattle  Varies  Under  Different  Conditions,  43; 

Inaccuracy  of  the  Seasonal  Differentials,  49. 


IV.  CAUSES  OF  THE  CONTINUATION  OF  MILK  PRODUCTION  AT  A LOSS 56 

Market  Conditions,  56;  Difficulty  of  Changing  the  Type 
of  Farming,  58;  Feed  Charged  at  Cost  of  Production,  63; 
Over-estimation  of  the  Returns  Not  Milk,  63;  Confusion 
of  Wages  and  Profits,  65;  Significance  of  Sub-marginal 
Milk  Production,  67. 

V.  PRACTICABILITY  OF  FIXING  MILK  PRICES  BY  THE  USE  OF  COST 

FORMULAS  59 


■ 


COST  OF  PRODUCTION  AS  A MILK  PRICE  DETERMINANT 


I.  INTRODUCTION 

Dairying  Under  War-time  Conditions 

After  the  United  States  entered  the  World  War,  rapid  price  changes 
occurred  with  resulting  maladjustments  in  industry  and  agriculture  similar  to 
those  which  occurred  at  the  beginning  of  the  Civil  War.  The  prices  of  grains 
mounted  rapidly  but  the  prices  of  animal  products,  and  especially  of  dairy 
products,  lagged  behind. ^ Producers  of  milk  for  fluid  consumption  were  ser- 
iously affected  by  these  changes.  The  consuming  public,  long  accustomed  to  a 
uniform  retail  price  for  milk,  objected  vigorously  to  any  advance  and  voiced 
its  disapproval  each  time  the  price  was  increased  by  decreasing  the  amount  of 
mil-:  normally  consumed. 2 The  urban  population  regarded  the  price  of  milk  no 

differently  than  it  did  the  five-cent  street  car  fare,  the  price  of  bread  or 
beer,  or  any  of  the  other  commodities  or  utilities  for  which  it  was  accustomed 
to  pay  a uniform  price.  However,  this  attitude  of  the  consumers  tended  to 
keep  down  milk  prices  paid  the  producers  at  a time  when  feed  costs  were  in- 
creasing rapidly. 

The  dissatisfaction  among  dairymen  resulting  from  this  condition  led 
to  milk  strikes  in  many  districts  where  farmers  7/ere  organized,  and  stimulated 

1 Warren , G.  F . , Prices  of  Farm  Products , Jour,  of  Farm  Econ.  II,  No  .2. 
Apr.,  1920,  pp.  G1-S9 . 

Do.  Prices  of  Farm  Products  in  the  United  States,  U.S.D.A.  Bui.  599. 

2l.Ulk  Inquiry,  Hearing  at  Chicago,  Dec.  26,  1917,  p.3120. 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/costofproductionOOross 


2 


the  formation  of  bargaining  associations  in  unorganized  territory.  Since 
milk  is  30  vitally  Important  in  the  human  dietary,  the  closing  of  a city's 
supply  by  a strike  of  only  a few  days  duration  was  a threat  against  the  wel- 
fare of  the  people.  If  the  territory  was  well  organized,  enough  milk  could 
be  held  back  from  the  city  so  that  condensed  milk  or  milk  of  a poor  quality 
brot  in  from  outside  the  regular  zone  had  to  be  substituted  for  the  usual 
fresh  product.  Hence,  when  a strike  was  called,  the  city  press  invariably 

clamored  for  the  suppression  of  the  farmers'  organizations  and  in  many  local- 

/ 

ities  the  officers  and  directors  of  the  co-operative  associations  were  in- 
dicted under  the  anti-trust  laws.  In  other  instances,  wiser  action  was  taken 
by  leaders  of  the  milk  producers,  the  milk  distributors,  and  various  state 
and  federal  officials  who  attempted  to  find  some  method  of  price  determination 
which  would  supply  the  consumers  with  milk  at  a reasonable  cost  and  would  at 
the  same  time  give  the  producers  a price  which  was  high  enough  to  keep  the 
industry  in  a healthy  state  of  stimulation  in  order  to  insure  an  adequate  sup- 
ply for  the  future. 

The  Chicago  Dairy  District 

The  various  phases  of  dissatisfaction,  strikes,  indictments,  in- 
vestigations, and  price  fixing,  which  was  typical  of  the  whole  dairy  industry, 
were  experienced  in  full  by  the  dairymen  producing  for  the  Chicago  market. 

The  district  which  supplies  Chicago  with  approximately  1,000,000  quarts  of 
milk  daily  covers  parts  of  three  states  and  comprises  a region  somewhat 
rectangular  in  shape  extending  almost  two  hundred  miles  north  and  south  and 
about  one  hundred  miles  east  and  west.l  northern  Indiana,  having  excellent 

^Hibbard,  B . H.,  and  Erdraan,  E.  H. , Marketin'?  Wisconsin  Milk,  Wis.  Agr . 
Exp.  Sta.  Bui.  285,  p.  21,  1917. 


' 


3 


transportation  facilities,  sends  some  milk  to  Chicago  around  the  southern  end 
of  Lake  Michigan  hut  this  constitutes  only  a small  part  of  the  city's  supply. 
The  region  south  of  Chicago  lias  as  good  means  of  transportation  as  any  other 
part  of  the  dairy  district  hut  produces  relatively  little  milk.  This  is  due 
largely  to  a competing  type  of  agriculture,  corn-growing  being  more  profitable 
than  dairying.  To  the  west  of  the  city,  dairying  as  the  principal  farming 
enterprise  gradually  gives  way  to  a mere  general  type  of  agriculture  in  which 
the  feeding  of  hogs  and  steers  plays  an  important  part.  In  this  region  con- 
siderable quantities  of  butter  fat  and  of  milk  for  condensing  are  produced. 

The  district  extends  north  from  the  city  well  up  into  Wisconsin,  overlapping 
the  Milwaukee  milk  zone  and  tapping  the  butter,  cheese,  and  condensing  region 
which  produces  an  enormous  amount  of  milk  for  manufacture.  It  is  quite  evi- 
dent, therefore,  that  the  Chicago  fluid  milk  district  is  not  only  capable  of 
great  expansion  to  me9t  the  needs  of  an  increasing  population,  but  that  the 
territory  to  the  north  is  already  fully  developed  as  a dairy  region.  Much 
of  the  milk  which  is  produced  for  manufacture  in  that  region  can  be  diverted 
to  the  city  for  fluid  consumption  if  the  price  of  whole  milk  is  very  much 
higher  than  the  price  obtained  for  milk  used  in  the  manufacture  of  the  various 
products.  This  alternative  market  for  milk  has  a very  marked  influence  upon 
Chicago  milk  prices  and  is  a disturbing  factor  in  any  system  of  price  determin- 
ation . 


Dairymen ' s Or  gan i za  t i on  s 

The  advantage  of  collective  action  in  obtaining  fair  prices  for  milk 
wa3  early  recognized  in  this  region  and  various  associations  were  formed. 
Dairymen  in  the  Chicago  district  were  organized  in  1SS7  under  the  name  of 


"The  Milk  Shippers'  Union  of  the  Northwest”  but  the  company  failed  to  fulfill 


” 


■ ti. 


' 


4 


expectations  and  soon  disappeared,^-  In  1897  a second  company  was  incorporated 
as  "The  Milk  Shippers’  Union”* 2  and  this  company  continued  until  June,  1911,  at 
which  time  the  Milk  Producers  Association  took  over  the  activities  of  the  older 
association. 2 The  Milk  Producers  Association  was  primarily  a bargaining  agent, 

giving  the  dairymen  a much  stronger  voice  in  the  determination  of  prices  than 
wa3  possible  under  the  old  system  of  the  individual  farmer  contracting  with  the 
dealer . 


Before  the  formation  of  this  association,  milk  distributors  and  con- 
densing companies  posted  prices  twice  a year  stating  the  amount  they  would  pay 
for  milk  during  the  following  six  months.  A short  period,  usually  of  about 
two  weeks,  was  allowed  the  farmers  in  which  to  sign  the  contracts  at  these 
prices.  If  a farmer  refused  to  sign  within  the  specified  time,  his  milk  was 
turned  back  from  the  plant  or  factory.  If  no  other  milk  plant  was  within 
practicable  hauling  distance  of  his  farm  his  only  alternative  was  to  find  a 
buyer  in  Chicago  to  whom  he  could  ship  his  milk  directly.  In  one  instance, 
the  prices  paid  by  a company  were  determined  in  the  head  office  of  that  company 
in  hew  York  and  the  local  plants  were  then  ordered  to  nay  these  prices  for  the 
ensuing  six  months.^  As  tnis  company  owned  a number  of  plants  and  was  one  of 
tne  _arge3t  buyers  of  milk  in  the  Chicago  territory,  many  other  companies 
adopted  their  prices  and,  as  a consequence,  it  v/as  commonly  charged  by  the  pro- 
ducers that  milk  prices  were  arbitrarily  set  in  New  York. 

These  arbitrary  metnods  of  price  fixing  were  more  or  less  successfully 
opposed  by  the  Milk  Producers  Association.  However,  this  bargaining  agent 


iRural  New  Yorker,  Sept.  17,  1887. 

2New  York  Produce  Review,  Nov.  24,  1897. 

®Milk  News,  June,  1911. 

^.lilk  Inquiry,  Hearing  at  Chicago,  Jan.  3,  1918,  pp . 3845-3847. 


■ 


5 


did  not  solve  the  problem  of  surplus  rtiilk^  and  the  outgrowth  of  this  was  the 
formation  of  the  Milk  Producers  Co-operative  Marketing  Company  and  the  pooling 
method  of  marketing  milk  which  will  be  discussed  later.  Altho  the  Marketing 
Company^  was  started  in  1916,  it  was  not  fully  organized  or  prepared  to  market 
the  milk  of  its  members  until  January,  1919. 

Statement  of  the  Problem 

As  a result  of  the  abnormal  war-time  conditions,  an  agreement  was 
reached  in  July,  1918,  between  the  milk  producers  in  the  Chicago  dairy  district 
and  the  milk  dealers,  whereby  the  prices  paid  for  milk  during  the  ensuing  five 
months  were  to  be  determined  by  applying  current  values  of  feed  and  labor  to  a 
cost  of  production  formula  which  l^ad  been  evolved  after  a long  period  of  in- 
vestigation. This  cost  computation  was  made  each  month  by  the  Department  of 
Dairy  Husbandry  of  the  University  of  Illinois,  and  the  value  thus  obtained 
was  accepted  by  the  producers  and  the  distributors  as  the  price  to  be  paid 
for  milk  at  the  receiving  stations  in  the  country. 

This  method  of  price  determination  was  used  for  the  period  agreed 
upon. (August  to  December,  1918)  with  apparent  satisfaction  to  all  concerned. 

Por  these  five  months  and  for  January,  1919,  following  the  expiration  of  the 
agreement,  the  computed  costs  and  the  milk  prices  were  identical.  There  was 
no  over-production  of  milk  during  this  period  because  the  dairymen  felt  that 
the  price  covered  cost  of  production  only,  no  allowance  for  profit  having  been 
made  in  the  formula.  On  the  other  hand,  milk  prices  were  relatively  high 
and  the  outlook  for  the  future  of  the  industry  was  considered  promising.  Many 
producers  would  have  been  glad  to  have  continued  the  cost  method  of  setting 

^By  surplus  milk  is  meant  the  milk  produced  in  excess  of  the  amount 
consumed  in  fluid  form . 

‘'Synonomous  with  Milk  Producers  Co-operative  Marketing  Company. 


. 


prices  but,.  Deg inning  with  February,  1919,  the  producers'  marketing  organ- 
ization and  the  milk  dealers  reverted  to  their  previous  method  of  bargaining. 
The  cost  computations,  however,  were  used  by  the  producers  as  a basis  for  bar- 
gaining and  for  the  next  nine  months  the  price  obtained  for  milk  was  almost 
the  same  as  the  formula  cost  of  production.^ 

The  price  paid  by  the  dealers  for  milk  testing  3.5  percent  and  the 
formula  cost  of  production  for  each  month  from  September,  1918,  to  December, 
1921,  are  given  in  Table  1 and  shown  graphically  by  Fig.  I.-")  The  dealers' 
prices,  however,  do  not  represent  the  prices  received  b"r  the  producers  except 
for  the  last  five  months  of  1918.  Beginning  with  January,  1919,  most  cf  the 
milk  produced  In  the  dairy  district  tributary  to  Chicago  was  sold  thru  the 
Milk  Producers  Co-operative  ..arketing  Company.  This  organization  acted  as  a 
bargaining  agent  for  the  dairymen  in  the  sale  cf  their  milk  and  al3o  manu- 
factured various  dairy  products  from  the  surplus  milk.  The  price  paid  to  the 
producers  by  the  Marketing  Company  was  a pool  price  representing  the  average 
price  obtained  for  all  cf  the  milk,  whether  it  was  sold  for  fluid  consumption 
and  manufacture  or  wa3  converted  into  manufactured  dairy  products  in  the  plants 
owned  or  leased  by  the  company.  The  value  of  milk  for  manufacture,  especial- 
ly during  1920  and  1921,  was  very  much  lower  than  the  value  of  market  milk 
and  as  a result  the  pool  price  to  the  producers  during  the  entire  period 
ranged  from  1 to  10  percent  below  the  dealers'  price  and  on  several  occasions 
lell  even  lower  than  this.  It  will  be  noted  from  Fig.  1 that  the  pool  price 
shows  great  irregularity  for  May,  1921,  and  has  not  been  plotted  for  the 

^The  terms, "formula  cost  of  production",  "theoretical  cost  of  produc- 
tion", and  "computed  cost  of  production"  are  here  used  synonomously  as  distinct 
from  "real  cost  of  production". 

^References  to  c liar t s and  tables  are  of  the  form  used  in  publications 
of  the  Illinois  Agricultural  Experiment  Station. 


1 


■ 


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7 


Table  1.-  Prices  Paid  for  3.5  Percent  Milk  in  the  Chicago 
Dairy  District  and  the  Formula  Cost  of  Producing  Milk 


Year 

1918 

1919 

1920 

1921 

Month 

^Dealers ’ 
price  per 
100  lbs. 

2pool 
price  per 
100  lbs. 

3Formula 
cost  per 
100  lbs. 

Dealers ' 
price  per 
100  lbs. 

Pool 

price  per 
100  lbs. 

Formula 
cost  per 
100  lbs. 

Dealers’ 
price  per 
100  lbs. 

Pool 

price  per 
IOC  lbs. 

Formula 
cost  per 
100  lbs. 

Dealers ' 
price  per 
100  lbs. 

Pool 

price  per 
100  lbs. 

Formula 
cost  per 
ICO  lbs. 

Jan . 

$ 

$ 

$ 

$3.76 

$3.72 

$3.76 

$3.60 

$3.56 

$3.88 

$2.50 

$2  .25 

$3.38 

Feb  . 

---- 

— 

3.50 

3.46 

3.70 

3.35 

3.28 

3.81 

2.35 

2.11 

3.11 

Mch . 

-- 

— 

3.00 

2.97 

3.40 

2.90 

2.75 

3.70 

2.35 

2.11 

2.80 

Apr. 

— 

— 

— 

2.80 

2.77 

2.99 

2.75 

2.61 

3.40 

2.35 

2.11 

2.41 

May 

— 

— 

— 

2.50 

2.42 

2.57 

2.70 

2.62 

2.92 

2.05 

1 .02 

1.99 

June 

.... 

— 

— 

2.50 

2.42 

2.35 

2 .75 

2.57 

2.66 

2.05 

1.84 

1.66 

July 





3.00 

2.97 

2.94  . 

3.20 

3 .10 

3.40 

2.30 

1 .84 

1 .99 

Aug . 

2.75 

— 

2.75 

3.52 

3.48 

3.23 

3 .70 

3.51 

3.69 

2.30 

2.07 

2.18 

Sept . 

2.92 

— 

2.92 

3.55 

3.51 

3.46 

3.70 

3 .33 

3.56 

1.50 

1 .35 

2.31 

Oct . 

3.32 

— 

3.32 

3.63 

3.59 

3.82 

3.70 

3 «o3 

3.81 

1 .75 

1 .57 

2.54 

Nov . 

3.68 

— 

3.58 

3.60 

3.56 

3.85 

3.05 

2.74 

3.78 

1 .80 

— 

2.68 

Dec  . 

3.77 

— 

3.77 

3.65 

3.61 

3.88 

2.60 

2.34 

3.59 

1 .80 

2.65 

Average 

— 

.... 

— 

3.25 

3.21 

3.33 

3.17 

2.99 

3.51 

2.09 

— 

2.47 

111  ilk  prices  obtained  from  the  Bowman  Dairy  Company,  Chicago,  111. 

2Pool  prices  obtained  from  the  Milk  Producers  Co-operative  Market- 
ing Company,  Chicago,  111. 

^Formula  costs  from  the  original  computations,  Dept,  of  Dairy  Huso., 

Univ.  of  111. 


I?6I * « 0?6I  * «— 6161 * « — — 8/61 

•1?0 jdy  ' m>£ l*Q S]»£ Jdj/ u VJ> PO  6(r>p  Uoj> 


9 


months  of  November  and  December  of  that  year.  For  some  months  previous  to 
May,  the  10  percent  spread  between  the  dealers’  price  and  the  pool  price  was 
not  sufficient  to  cover  the  difference  between  the  value  of  fluid  milk  and  the 
value  of  milk  sold  or  used  for  the  manufacture  of  other  products.  As  a result 
the  Marketing  Company  bacame  involved  in  financial  difficulties  and  in  order 
to  take  care  of  a part  of  the  liabilities,  the  May  price  to  the  farmers  was 
set  at  cne-half  the  dealers’  price.  The  dairymen,  for  the  most  part,  were 
unaware  of  the  financial  condition  of  their  co-operative  organization  and  the 
May  assessment  car.e  a3  a surprise.  Approximately  half  of  the  members  immed- 
iately broke  their  contracts,  which  provided  for  the  sale  of  their  milk  thru 
the  company,  and  began  selling  directly  to  the  dealers.  Following  this  the 
decline  of  the  Marketing  Company  was  rapid  and  because  of  the  involved  affairs 
of  the  organization,  the  November  and  December  pool  prices  are  not  available. 

If  the  milk  prices  obtained  by  the  producers  are  compared  with  the 
formula  cost  of  production  computations  (Table  1 and  Fig.  1),  it  will  be  seen 
that  only  twice  during  the  period  from  October,  1919,  to  December,  1921,  was 
the  pool  price  as  high  as  the  formula  cost  of  producing  milk.  For  the  other 
months,  the  prices  paid  to  the  farmers  ranged  from  $ .11  to  $ 1.25  per  hundred- 
weight below  the  theoretical  cost  of  production.  It  might  be  supposed  that 
these  conditions  would  have  curtailed  production  and  that  a serious  shortage 
of  milk  would  have  resulted.  Contrary  to  this  supposition,  however,  the 
Chicago  milk  market  was  virtually  flooded  during  the  greater  part  of  this  time 
and  the  district  has  probably  never  known  as  great  a surplus  of  milk  as  was 
produced  during  1920  and  1921. 

It  is  proposed  in  this  thesis  to  trace  the  development  of  the  cost  of 
production  formula  and  to  analyze  the  seeming  anomoly  whereby  an  enormous 
surplus  of  milk  was  produced  during  the  period  of  two  years  when  milk  prices 


' 


were  approximately  20  percent  "below  the  theoretical  cost  of  production.  The 
formula  and  the  method  of  its  application  in  computing  this  theoretical  cost 
of  producing  milk  will  he  examined  in  order  to  determine  whether  or  not  the 
computed  cost  of  production  was  the  same  as  the  real  cost  of  production.  In 
addition,  a number  of  economic  factors  which  influence  the  production  of  milk 
will  he  discussed  in  relation  to  the  cost  method  of  determining  milk  nr  ices 
and  some  conclusions  will  he  drawn  from  the  study  in  regard  to  the  practica- 
bility of  fixing  city  milk  prices  by  the  use  of  cost  formulas. 


* 


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11 


II.  DEVELOPMENT  OE  THE  COST  FORMULA 


Events  Preceding  the  Period  cf  Price  Fixing 


In  the  spring  of  1916  the  Chicago  Milk  Producers  Association  and 
the  milk  dealers  failed  to  reach  an  agreement  in  regard  to  milk  prices  for 
the  ensuing  six  months . As  a result,  mil’  was  withheld  from  Chicago  for 
the  first  week  cf  April  and  the  city’ 3 milk  supply  was  curtailed  to  such  an 
extent  that  the  dealers  were  forced  to  agree  to  the  prices  demanded  by  the 
producers.!  The  success  cf  this  milk  strike  strengthened  the  dairymen's 
cc-operative  organization  and  its  membership  was  greatly  increased,  reaching 
a total  of  about  11,500  by  October  .2 

The  increase  in  the  price  of  milk,  however,  did  not  keep  pace  with 
the  increase  in  the  price  of  feed  which  advanced  rapidly  in  the  fall  of  the 
same  year  (1916).  During  this  period,  mill  feeds  advanced  at  a much  slower 
rate  than  corn.  This  was  due  to  the  fact  that,  altho  corn  normally  consti- 
tutes about  half  of  the  concentrate  ration  for  dairy  cattle  in  the  Chicago 
district,  the  proportion  of  the  total  corn  crop  so  used  is  too  small  to  have 
any  great  effect  upon  the  aggregate  demand . 'Till  feeds,  on  the  other  hand, 
find  their  principal  market  in  dairy  regions  and  the  prices  of  such  feeds  are 
much  more  intimately  related  to  the  prices  of  dairy  products. 

Table  2 and  Fig.  2 show  by  the  use  cf  index  numbers,  the  lag  in  milk 
prices  as  compared  with  corn  and  mill  feed  prices.  The  five-year  average, 
January,  1309,  to  December,  1913,  for  each  month  was  taken  as  the  base,  100. 


^Hoard's  Dairyman,  Apr.  14,  1916,  p,  511. 
Lk  Hews,  Oct.,  1916,  p.  4. 


■ 


. 


12 


Table  2.-  Index  Numbers  of  Milwaukee  Wholesale  Prices  of  Mill  Peeds 
Chicago  Corn  No.  2,  and  Prices  Paid  Farmers  for  Milk  in  the  Chicago  District 

Base,  1909-1513 


t 

1915 

1916 

1917 

Month 

■4.1111 

feeds 

2Corn 

3Milk 

Mill 

feeds 

Corn 

Milk 

Mill 

feeds 

Corn 

Milk 

Jan . -- 

106 

126 

110 

105 

132 

93 

138 

172 

115 

Feb.  -- 

109 

130 

107 

106 

132 

89 

144 

174 

116 

Mch . — 

105 

122 

11C 

103 

125 

90 

154 

189 

116 

Apr . — 

108 

121 

103 

102 

122 

117 

171 

232 

170 

May  -- 

103 

117 

103 

101 

114 

124 

163 

251 

171 

June  — 

106 

115 

1C4 

104 

115 

118 

159 

264 

151 

July  — 

109 

116 

102 

105 

122 

122 

177 

306 

167 

Aug.  — 

108 

114 

110 

111 

124 

121 

181 

273 

163 

Sept .— 

103 

108 

106 

114 

129 

115 

171 

301 

158 

Oct.  — 

103 

100 

SI 

125 

151 

113 

Nov.  — 

104 

103 

90 

144 

153 

115 

Dec . — 

108 

119 

87 

142 

153 

111 

^Daily  reports  of  the  Western  Feed  Market  Bureau,  Milwaukee,  Wis . 
2Board  of  Trade,  Chicago,  Annual  Reports. 

2>Milk  News . 


191 J > < 19/e > < 19/7 


14 


For  the  six  months,  October,  1916,  to  March,  1917,  the  milk  index  was  practi- 
cally constant,  ranging  only  from  111  to  115.  Mill  feeds,  .however,  increased 
from  125  to  154  while  corn  went  from  151  to  189.  This  increase  in  feed  prices 
resulted  in  the  dairymen  demanding  and  receiving  a schedule  of  prices  for  the 
next  six  months  (April  to  September ) which  brought  the  milk  price  index  up  to 
lo3  as  a;:  average  cf  t ,e  period. 1 :ill  feed  prices  were  on  approximately  the 
same  level  as  milk,  but  corn  prices  had  continued  to  ascend  at  a rapid  rate  and 
the  average  index  number  for  the  six  months  was  271. 

Y/hen  the  delegates  of  the  Milk  Producers  Association  met  September  21, 
1917,  to  discuss  milk  prices  for  the  next  six  months,  their  demands  were  based 
upon  conditions  in  the  industry  indicated  by  the  price  index.  Mill  feeds  were 
71  percent  and  corn  201  percent  aoove  the  five-year  average,  while  milk  prices 
were  only  58  percent  above  the  pre-war  level.  National  Food  Administrator, 
ixerbert  ..oover , had  requested  that  milk  prices  be  set  from  month  to  month  in- 
stead o*  the  usual  metnod  cf  setting  them  for  six  months  in  advance,  and,  there- 
fore, the  asking  price  for  October  only  was  agreed  upon  at  this  time.  This 
was  determined  by  averaging  the  prices  demanded  by  the  delegates  of  the  various 
locals  of  the  association.^  The  result  was  a price  of  $ 3.42  per  100  pounds 
of  milk  testing  3.5  percent.  The  delegates  voted  to  demand  this  amount  for 
October  and  at  the  same  time  authorized  the  milk  board* * 3  of  the  association  to 
set  the  price  for  the  next  five  months  provided  it  was  not  less  than  $ 4.00. 

The  strength  of  the  Milk  Producers  Association  had  been  shown  by  the  strike 
in  April,  191a,  and  the  increase  of  $ 1.12  over  the  September  price  of  $ 2.30 

board's  Dairyman,  Apr.  13,  1917,  p.  542. 

^Ib id.  Oct.  5,  1917,  p.  332. 

3A  committee  of  the  directors  authorized  to  deal  with  the  distributors 
and  manufacturers  in  setting  milk  prices. 


- 


. 


. 


15 


was  accepted  by  the  milk  dealers  with  much  less  objection  than  bad  been  an- 
ticipated by  the  producers. 

When  the  price  schedule  had  bean  made  in  April,  1917,  the  increased 
price  paid  the  producer  was  passed  or.  to  the  consumers  by  raisin;.?:  the  retail 
price  of  milk  from  9 to  10  cents  a quart .and  this  was  increased  to  13  cents 
when  the  October  price  of  $ 3.42  was  agreed  upon.  Announcement  of  the  new 
price  was  followed  by  a raid  upon  the  office  of  the  Milk  Producers  Association 
on  September  26  by  representatives  of  the  State's  Attorney.  All  of  the  books 
and  correspondence  of  the  association  were  seised  for  the  purpose  of  obtaining 
evidence  of  any  illegal  practices  of  the  producers  in  enforcing  their  demands 
for  higher  milk  prices.^  On  October  17,  the  Cook  County  grand  jury  returned 
true  bills  against  the  following  members  of  the  association  who  formed  the 
milk  board  which  passed  finally  upon  the  milk  price  and  contracts  for  October: 
Charles  K.  Potter,  Clinton  J.  Cooper,  William  J.  Goodwin,  Arnold  Huber,  and 
Eoy  Lewis.  The  indictment  charged  restraint  of  trade  by  the  formation  of  a 
combine  to  fix  the  prices  at  which  milk  should  be  sold  in  Cook  County  and  to 
eliminate  all  competition  between  milk  dealers  in  the  selling  of  milk.  Before 
these  men  came  to  trial,  the  secretary,  W.  J.  Kittle;  the  treasurer,  F.  II. 
Peese;  and  a director,  Pi . M.  Omann,  had  been  indicted  on  the  same  charges. 

Altho  the  eight  officials  were  found  not  guilty  on  all  counts  when 
tne  case  was  finally  tried,  the  action  of  the  State's  Attorney  in  bringing 
the  indictments  because  of  the  increased  milk  prices,  encouraged  the  milk 
dealers  to  resist  the  demands  of  the  producers  in  regard  to  the  November  urice . 
One  company  offered  $ 3.00  per  hundredweight^  and  another0  offered  an  average 


^Milk  News,  October,  1S17,  p.  5. 
^Prairie  Farmer,  Nov.  17,  1917,  p.  6. 
3IIilk  News,  February,  1918,  p.  10. 


■ 


* 


1 

. 


16 


price  for  the  next  five  months  of  $ 3.21,  while  the  locals  of  the  association 

asked  various  prices  ranging  from  $ 3 .42  to  $ 3 . 71 . A number  of  small  dealers 

in  Chicago  paid  $ 3.42  and  continued  to  receive  milk  after  November  1,  but  the 
refusal  of  the  larger  companies  to  pay  the  price  asked,  again  resulted  in  much 
of  the  milk  being  withheld  from  the  city.  With  the  question  of  the  legality 
of  collective  action  in  the  3 ale  of  milk  still  undecided,  the  dairymen  took 

care  to  claim  that  they  were  acting  as  individuals  in  withholding  their  milk 

altho  there  were  charges  that  a few  producers  we re  forced  to  haul  their  milk 
cacK  to  the  farm  and  a few  cans  were  dumped  upon  the  read.  A serious  milk 
shortage  was  imminent  when  Harry  A.  Wheeler,  Illinois  Food  Administrator,  pre- 
sented a plan  of  mediation  on  November  2 which  was  accepted  by  both  the  dealers 
and  the  producers,  and  the  deadlock  was  broken. 

In  brief,  his  plan  was  as  follows: ^ The  producers  were  to  accent 
$ c .22  for  their  November  and  December  milk,  but  in  the  meantime  a commission 
*v'&s  to  oe  appointed  which  would  determ  ine  the  cost  of  producing  milk  and  also 
decide  upon  what  constituted  a reasonable  profit.  Milk  prices  were  to  be 
set  by  the  commission  for  six  months  beginning  January,  1918.  If  $ 3.22 
was  found  to  be  too  low  for  November  and  December,  the  loss  was  to  be  made 
up  by  an  added  increase  to  the  price  for  the  following  six  months.  The  retail 
price  of  milk  was  to  be  reduced  to  12  cents  per  quart  for  the  months  of  Novem- 
ber and  December  and  the  investigation  was  to  cover  the  cost  of  distributing 
milk  as  well  as  the  cost  of  producing  it. 

Altho  some  dissatisfaction  was  manifested  by  the  nroducers  because 
o:  tae  compromise  price  of  $ 3.22,  in  general,  they  were  content  to  await  the 
decision  of  the  milk  commission,  believing,  however,  that  the  price  was  below 


^Prairie  Farmer,  Nov.  17,  1917,  p.  6. 


. 


" 


17 


the  actual  cost  of  production  and  would  be  increased  as  provided  for  in 
Wheeler's  plan. 

The  Chicago  Milk  Inquiry 

Upon  the  agreement  of  the  producers  and  the  distributors  to  accent 
the  findings  of  the  milk  commission,  Mr.  Wheeler,  acting  for  the  United  States 
Food  Administration,  appointed  as  members  of  the  committee  the  following 
' persons : ^ 

John  S.  Miller,  Attorney,  Chairman 

W.  J.  Kittle,  Secretary  of  the  Milk  Producers  Association 

John  J.  Fitzpatrick,  lanager  of  Borden’s  Farm  Products  Company 

John  Harris,  President  of  the  Wisconsin  Butter  and  Cheese  Company 

Eugene  Davenport,  Dean  of  the  College  of  Agriculture,  University 

of  Illinois 

P.  G-.  Holden,  Farm  Advisor  for  the  International  Harvester  Company 

Mrs.  Edward  P.  Welles,  Women’s  organizations  of  Chicago 

John  W . O'Leary,  President  of  the  Chicago  Association  of  Commerce 

Lucius  Teter,  President  of  the  Infants  Welfare  Society. 

In  addition  to  these  nine  members,  the  City  of  Chicago,  the  State's 
Attorney,  the  Federal  Department  of  Justice,  the  State  Council  of  Defense,  and 
the  Chicago  Federation  of  Labor  were  permitted  to  name  representatives  who 
acted  in  an  advisory  capacity. 

The  Corrmlssion  held  public  hearings  from  December  3,  1917,  to  Jan- 
uary 31,  1916,  during  which  time  evidence  consisting  of  5,874  pages  of  testi- 
mony was  presented  by  the  producers,  the  distributors,  the  City  of  Chicago, 

^Hoard's  Dairyman,  Dec.  7,  1917,  p.  695. 


V 


. 


' 

. 


18 


t:ie  State's  Attorney,  and  the  City  Club.  Testivnony  was  riven  under  oath 
and  the  hearings  were-  conducted  somewhat  after  the  usual  i overt  procedure  altho 
greater  latitude  was  permitted  in  the  givin g of  testimony  and  in  cross-exam- 
ination of  the  witnesses.  At  times  the  real  purpose  of  the  inquiry  was  ap- 
parently lost  sight  of  by  some  of  the  attorneys  and  the  hearings  were  often 
enlivened  by  tilts  between  Charles  S.  Deneen,  ex- governor  of  Illinois,  who 
appeared  for  the  Milk  Producers  Association,  and  Nicholas  Michels,  who  appeared 
for  state's  Attorney  Hoyne . Michels  was  apparently  in  search  of  evidence  to 
use  against  the  eight  indicted  officials  of  the  association  whose  case  was  then 
pending,  while  Deneen  had  been  retained  as  chief  counsel  by  the  defense.1 

The  evidence  relating  to  the  cost  of  milk  production  presented  by  the 
producers  was  of  two  general  kinds: 

1.  Cost  investigations  conducted  by  colleges  of  agriculture. 

2.  Cost  records  kept  by  individual  dairymen  in  the  Chicago  dairy 

district . 


Of  the  first  type  of  evidence,  the  studies  of  F.  A.  Pearson  of  Ill- 
inois and  of  0.  F.  Warren  of  Cornell  were  outstanding.  Pearson’s  work  was 
based  upon  cost  accounting  studies  which  had  been  conducted  by  t?.e  Department 
of  Dairy  Husbandry  for  other  purposes  but  which  were  available  for  the  milk 
inquiry.  The  data  he  presented  were  obtained  from  35  farms2  on  which  there 
were  873  sows  producing  5,583,892  pounds  of  milk  during  a two-year  period, 
from  the  spr in  of  181 -i  to  the  spr in  g of  1915.  He  found  that  the  micellaneous 

minor  costs  of  producing  milk,  such  as  interest,  use  of  buildings  and  equip- 
ment, insurance,  taxes,  veterinary  fees,  medicines,  salt,  fly  protector,  etc., 


■‘■Milk  Inquiry,  Hearing  at  Chicago,  Dec.  7,  1917,  p.  878. 

2Pe  arson,  F.  A.,  The  Cost  of  Milk  Production,  111.  A:r . Exn.  Sta. 

Bui.  215,  1919. 


. 


IS 

approximately  equaled,  tue  returns  not  milk,  including  appreciation  in  young 
stocx,  the  value  of  the  manure,  the  calves  sold,  and  a few  small  items.  Hence, 
one  ne o cost  of  producing  milk  was  roughly  equal  to  the  expense  of  man  labor 
and  of  feed  exclusive  of  pasture.  The  feed  ana  labor  cost,  Pearson  expressed 
in  oSkuS  Ox  ooncodihes  to  which  could  be  applied  current  values  at  any  given- 
wi.i.e.  ni  s - in  dings , as  presented  to  the  Commission,  were  summarized  in  the 

following  formula  for  the  cost  of  producing  100  pounds  of  milk: 

■Grain  — — 44  pounds 

Silage  — - — — • 188  pounds 

Play 50  pounds 

Other  rou.ghage  39  pounds 

Man  labor 2.42  hours. 

The  above  formula  represented  the  average  annual  cost  of  producing 
milk  and  as  the  monthly  cost  varied  widely  because  cf  the  seasonal  differen- 
ces, it  was  necessary  to  make  some  adjustments  in  the  formula  in  order  to 
determine  the  cost  cf  milk  production  for  any  one  month.  This,  Pearson  did 
by  multiplying  the  average  year  cost  by  corrective  factors  representing  the 
monthly  deviation  from  the  average  annual  price  of  Chicago  milk  for  the  ten 
years,  ISO?  to  1915,  assuming  that  the  variation  in  prices  during  that  period 


was  sufficient  to  st 

insulate  a uniform 

production  cf 

milk 

The  percentage  varia 

ticns  follow: 

January 

119.0 

July 

33.7 

February 

114  .3 

August 

94  .2 

I !arch 

10G.5 

September 

96.7 

April 

94.2 

0c  tober 

109.2 

May 

73  .2 

November 

118.3 

June 

70.6 

Pec ember 

120.3 

. 


' 


20 


Professor  Warren1  s stud;/  v/as  based  upon  conditions  obtainin':  in  Hew 
York  and  altlio  presented  in  slightly  different  form,  showed  substantially  the 
same  results  as  Pearson's  work,  thus  serving  as  a check  upon  the  accuracy  of 
the  latter. 

Many  of  the  cost  records  presented  by  individual  dairymen  had  been 
kept  for  a number  of  years  under  the  supervision  of  the  Department  of  Dairy 
Husbandry  of  the  University  of  Illinois,  Whil e others  had  been  obtained  since 
the  question  of  de  term  in  in;:  the  cost  of  milk  production  had  been  brought  into 
prominence.  As  would  be  expected,  these  individual  records  showed  widely 
vary  in  c costs  because  of  t e differences  in  the  season  of  production,  t"  e 
number  of  dry  cows  and  the  amount  of  young  stock,  the  production  of  the  herds, 
and  the  methods  of  management.  Such  variations  were  pointed  out  by  the 
groups  interested  in  maintain in  low  milk  prices  as  indicating  innacuracy  in 
keeping  the  accounts. 1 

J.  B.  Bain  of  the  Dairy  Division  of  the  United  States  Bureau  of 
Animal  Industry  who  had  charge  of  a cost  accountin'  investigation  in  Indiana, 
was  called  by  one  of  the  Consumers’  interest  -roups  with  the  apparent  expec- 
tation that  he  would  present  evidence  contradictory  to  the  Pearson  formula 
but  instead,  his  work  tended  to  substantiate  that  of  Pearson. 2 

As  the  testimony  presented  by  the  distributor  and  t.  e consumer  groups 
had  very  little  bearing  upon  the  subject  of  this  study,  reference  to  it  will 
be  omitted  except  in  so  far  as  it  relates  to  a much  argued  question  of  account- 
ing practice.  The  producers  held  that  farm-grown  feeds  should  be  charged  to 
the  cows  at  market  prices  less  the  cost  of  transportin'  them  to  market.  Those 
interested  in  low  milk  prices  charged  that  this  procedure  resulted  in  a double 

I'.Iilk  Inquiry,  Hearing  at  Chica  o,  Jan.  17,  1913,  pp.  5102-5111. 

2;.iilk  Hews,  Jan.,  ISIS.  p.  10. 


. 


. 


21 


profit,  ons  on  feeds  and  another  on  milk,  and  maintained  that  farm- grown  feeds 
should  be  charged  at  cost  cf  production.  It  was  the  consensus  of  opinion  of 
the  foremost  men  in  charge  of  farm  cost  accounting  investigations  that  feeds 
should  be  charged  at  market  prices  Industrial  accountants  brougl  t in  by 
the  consumer  group,  however,  testified  that  accepted  accounting  practice  in 
industry  required  that  raw  materials  be  charged  at  cost.2  Professor  Andrew 
Boss  of  Minnesota  was  called  to  Chicago  by  the  City  Club  but  when  his  views 
were  found  to  be  in  accord  with  those  of  tie  other  farm  accountants,  he  was 
permitted  to  return  without  testifying .3  The  contention  of  the  producers 
in  regard  to  the  correct  method  of  charging  farm- grown  feeds  was  eventually 
upheld  in  the  application  of  the  formula  which  was  evolved. 

Report  of  the  Milk  Commission 

VJhen  the  arbitration  agreement  was  entered  into  on  November  2,  it 
was  assumed  that  the  hearing  would  be  completed  by  the  middle  of  December, 
and  that  by  the  first  of  January,  1918,  the  Milk  Commission  would  announce 
prices  for  the  next  six  months.  That  date,  however,  found  the  hearing  only 
about  half  completed  and  the  price  agreement  of  $ 3.22  was  continued  thru 
January  by  common  consent.  It  was  not  until  February  2 that  the  report  of 
the  Commission  was  issued.  The  findings  of  the  Committee  were  given  out  in 
tie  form  of  a majority  report  signed  by  Miller,  O’Leary,  Teter , TJelles,  Fitz- 
patrick, and  Harris.  At  the  same  time  dissenting  minority  reports  were  is- 
sued by  Davenport,  Kittle,  and  Holden. 

barren,  G.  F.,  Farm  Management,  p.  55,  1916. 

Deneen,  Chaff.  S.,  Erief  of  Argument  for  M.  P.  A.,  pp.  3-10 

2Milk  Inquiry,  Hearing  at  Chicago,  Jan.  15,  1918,  p.  5112. 

Ibid.  Jan.  17,  1918.  p.  5520. 

3Ibid.  Jan.  15,  1918,  p.  5128.  


. 


22 


The  report  of  the  majority  of  the  Milk  Commission  as  sent  to  Food 
Administrator  Wheeler  was  very  different  from  what  had  been  anticipated  by  the 
producers.  .discouraged  by  the  apparently  conflicting  evidence  on  the  cost 
O-  milk  production,  and  seemingly  desirous  of  giving  Chicago  twelve— cent  milk, 
tre  majori  .y  Oj  oxie  committee  decided  that  the  prices  received  bv  the  “producers 
before  the  war  represented  cc3t  of  production  plus  a reasonable  profit  at  that 
time.  They  t..ieref ore  concluded  that  by  increasing  the  prices  received  during 
this  pre-war  period  by  a weighted  index  number  of  feed  and  labor,  cost  of  pro- 
duction £'aU3  a reasonable  prox  it  would  be  obtained  for  t e period  under  disuute 

Stated  in  the  words  of  the  report:^- 


the 

of 


"Two  methods  of  de terrain in,  the  cost  of  production  were  offered 
proceedings.  One  method  is  based  on  a formula  iving  quantity  and  p 
feec.  and  labor  and  incidentals  required  for  production  of  one  hundred 


in 

rice 

(ICO) 


pounds  of  milk.  The  second  method  is  based  on  the  price  and  quantity  of 
butter  fat  contained  in  one  hundred  (100)  pounds  of  ruilk."2 

"The  difficulty  presented  by  the  first  method  is  due  to  inability  to 
determine  either  cost  of  production  or  market  price  of  ALL  items  of  feed  and 
quantities  of  each.  There  exists  a variety  of  opinions  on  tie  amount  of  feed 
purchased  and  t)  e value  of  home  grown  feeds.  The  evidence  offered  by  experts 
ana  farmers  as  to  their  cost  of  production  by  the  application  formula  intro- 
duced oy  the  producers  showed  wide  variations  of  cost  extending  from  $ 2.05  to 
$ 12  Per  one  hundred  (100)  pounds.  This  shows  the  impossibility  of  aster- 
reining  coot  of  production  from  such  evidence.  ************************  « 


Viilk  Hews,  February,  1918,  p.  1. 

2The  second  method  was  introduced  by  the  representatives  of  the 


consumers . 


. 


23 


"It  would  appear  from  trie  testimony  that  the  dairy  industry  in  the 
Chicago  district  had  been  a reasonably  successful  industry  during  a normal 
period  of  ei  ht  years  precedin  . the  war  period.  Lands  had  increased  in  value 
- improvements  had  occurred.  The  financial  worth  of  those  engaged  in  the 
industry  had  aterially  improved.  That  profits  had  not  been  excessive  is 
indicated  by  the  normal  increase  in  the  supply  to  fill  the  demand.  Because 
O',  the  nature  of  ti  e industry,  had  profits  been  excessive  an  over  3upply  would 
have  followed;  lad  they  been  unsatisfactory,  a shortage  would  have  been  the 
result . " 


"The  Commission  finds  an  unusual  situation  existing  at  the  present 
time.  This  is  a season  of  heavy  surplus.  The  transportation  congestion  in 
the  East  and  at  the  Seaboard  has  made  it  difficult  to  ship  condensed  milk  and 
other  products  which  under  ordinary  conditions  would  absorb  the  surplus.  Ware- 
houses are  already  filled  with  these  products  await  in-  transportation.  Chi- 
cago las  reduced  its  milk  consumption,  occasioning  even  greater  surplus." 

"The  Commission  have  therefore  selected  as  a base  representing  cost 
pf  production  and  a fair  profit,  the  average  sale  price  per  one  hundred  (100) 
pounds  over  the  years  1908  to  1915  inclusive.  The  result,  of  course,  does 
not  represent  present  value,  due  to  the  large  advance  in  cost  of  feed  and  labor 
since  that  time.  The  quantity  of  feed  and  labor  per  one  hundred  (100)  grounds 
of  milk,  however,  is  the  same  in  both  periods.  Considering  the  eight  year 
period  as  a base  and  distributing  feed  and  labor  on  a basis  of  100  per  cent 
total  tl  e Commission  developed  the  following  ratio: 

19  Home  Grown  Grains 

19  Mill  Eeeds  (wheat  bran,  wheat  middlings,  hominy,  cotton  seed 
meal,  oil  meal,  gluten  feed,  dry  salt). 

35  Hay  (including  silage  valued  at  the  ratio  of  3 tons  of  silage 
to  1 ton  of  hay) . 

27  Labor 


100 


: 


. 


24 


"It  was  agreed  by  the  Commission  that  variation  in  the  price  of  those 
four  units  represents  with  sufficient  accuracy  when  applied  according  to  the 
above  ratio  the  increase  or  decrease  in  the  cost  of  production  of  milk.  The 
only  criticism  made  to  this  base  or  this  plan  was  by  a minority  of  the  mem- 
bers of  the  Commission  that  the  price  to  the  producer  during  the  eight  year 
period  referred  to  was  not  satisfactory  to  them." 


The  weighted  average  cost  of  feed  and  labor  for  November,  1917,  was 
found  by  the  Commission  to  be  77  percent  above  the  base  period.  The  eight- 
year  average  price  for  November  milk  was  therefore  increased  77  percent  and 
called  tie  cost  of  production  plus  a fair  profit  for  that  month.  In  a like 
manner  the  prices  for  the  following  seven  months  were  determined  using  the 
November  index  for  each  month  despite  the  fact  that  feed  prices  had  increased 
greatly  since  that  time,  so  that  the  index  number  of  177  was  too  low  even  at 
the  tine  the  Commission  reported  the  prices  (Feb.  2,  1918).  The  following 
prices  were  3et  by  the  Commission  for  the  ensuing  six  months:'  February,  $ 3.07 
iarcn,  § 2 . 8o ; April,  $ 2,49;  hay,  $ 2.04;  and  June,  $ 1.80.  T ey  further 


reccomraended  that  t,  e November,  Tec  ember , and  January  prices  be  left  at  $ 3.22 
altho  according  to  their  findings,  the  price  should  have  been  $ 3.13,  $ 3.20, 
and  $ 3.15,  respectively. 

The  dissenting  members  disagreed  with  the  view  of  the  majority  of 
the  Committee  in  regard  to  the  assumption  that  prices  received  during  the 
eight-year  period  represented  cost  of  production  plus  a fair  profit.  They 
pointed  out  that  tie  distributors  admitted  before  the  Commission  that  prices 
were  formerly  named  by  the  dealers  without  giving  the  dairymen  an  opportunity 
to  bargain.  This,  they  declared,  resulted  in  the  naming  of  prices  which,  at 
best,  gave  bare  cost  of  production  and  did  not  include  a profit.  The  fact 


that  the  i ilk  Producers  Association  had  its 


inception  during  this  period  was 


25 


taken  as  proof  that  prices  were  too  low.  Concerning  this,  W.  J.  Kittle  says 
in  his  minority  report: 1 

"The  only  testimony  on  the  part  of  the  distributors  as  to  the  methods 
pursued  by  them  before  April,  1916,  in  fixing  the  price  of  milk  is  the  tes- 
timony of  the  superintendent  of  the  El : in  branch  of  Borden's  Condensed  Milk 
Company , who  s tutor,  that  it  was  the  practice  of  his  distributing  company  to 
have  the  superintendents  make  the  inquiry  about  the  prosperity  or  lack  of  it 
among  the  dairy  farmers  and  then  to  meet  in  Haw  York  City  and  there  fix  the 
pri  ..  3 for  the  dairymen ' s milk  upon  the  general  prosperity  or  lack  of  it  among 
the  farmers  as  observed  by  the  superintendents,  and  without  any  investigation 
0^  or  regard  to  uhe  cost  of  milk  production]  in  other  words,  to  fix  it  unon 
'what  the  traffic  would  bear"'. 

"Prices  thus  fixed  without  any  consultation  with  the  farmers  brought 
so  many  hardships  to  the  farmers  that  it  led  to  the  forming  of  their  organi- 
sation with  tne  object  of  preventing  a continuance  of  this  arbitrary  fixing 
of  prices  and  terms  cf  sale  by  the  distributors.  Under  such  conditions,  this 
was  found  necessary,  not  only  to  preserve  the  herd  of  the  individual  farmer 
but  to  preserve  the  milk  industry  in  the  entire  dairy  district  which  serves 
tie  city  of  Chicago  itself.  The  average  of  ei^ht  years  adopted  by  the  major- 
ity of  the  Commission  covers  those  intolerable  years  of  struggle  with  the 
distributors  and  its  application  causes  tie  Federal  Government  to  prolong 
txiose  bad  conditions  in  the  settlement  of  this  controversy." 

Both  Kittle  and  Holden  objected  to  the  method  of  price  determination 
as  adopted  by  the  Commission,  as  well  as  to  the  base  period  which  was  selected. 


k I ilk  News,  Feb.,  1918,  p.  8. 


: 


maintained,  t^at  to  cost  formula  as  presentsd.  "by  Pearson,  should  *be  used 
since  it  had  been  substantiated  by  the  work  of  other  investigators.  Holden, 
in  his  minority  report,  says:  ~ 

"The  majority  of  the  Commission  in  fixing  the  prices  to  be  paid  to 
tne  producer  for  milk  ignore  the  facts  brought  out  in  the  sworn  testimony  of 
the  witnesses  in  the  hearing  to  determine  the  cost  of  milk  production.  The 
members  of  the  Comission  who  have  signed  the  report  did  not  consider  in  their 
deliberations  the  evidence  given  by  the  authorities  called  to  testify  from  the 
United  States  Department  of  Agriculture  ana  the  agricultural  colleges;  nor  the 
testimony  of  tne  dairy  farmers  themselves  who  gave  substantial  evidence  based 
on  cost  accounting  and  upon  years  of  experience  in  the  dairy  business.  In 
fairness  to  all  concerned,  producer,  distributor  and  consumer,  the  findings  of 
the  Commission  should  certainly  - ave  been  based  upon  the  'whole  of  the  evidence. 
This  was  not  done." 

Dean  Davenport  in  an  open  letter  to  Hood  Administrator  7/heeler , up- 
held tne  method  of  price  determination  advocated  by  the  majority  but  he  agreed 
with  Kittle  and  Holden  in  regard  to  the  selection  of  the  eight  years,  1908  to 
1915, as  a base.2  He  believed  that  prices  during  that  period  covered  cost  of 
production  only,  and  in  order  to  obtain  the  desired  cost  of  production  plus 
a fair  profit  for  the  months  under  dispute,  he  thot  that  the  base  price  should 
have  been  increased  by  ten  percent  before  being  multiplied  by  the  index  num- 
ber, 17?. 

xiiat  tne  Commission  failed  to  fulfill  its  obligations  and  deliberately 
violated  its  instructions,  was  freely  charged  by  the  dissenting  members.  Dean 
Davenport  says: 

"I  must  with  regret  express  the  conviction  that  my  own  opinions  and 


xMilk  News,  Mch. , 1918,  p.  9. 

2TMH  rm  Q_10 


27 


information  and  those  of  other  agricultural  college  men  and  of  the  producers 
counted  hut  lightly  in  the  councils  of  the  Commission." 

"The  majority  proceeded  from  the  assumption  that  Chicago  must  have 
11-cent  milk.  Upon  that  point  I obtained  a clear  expression  of  intention. 
This  in  my  opinion  violated  both  the  instructions  and  the  authority  of  the 
Commission . " 


Adoption  of  the  Modified  Formula 

Upon  the  announcement  of  the  findings  of  the  Committee  and  the  fix- 
ing of  the  February  milk  price  at  $ 3.07,  many  producers  again  withheld'  milk 
from  Chicago.  A3  late  as  February  16,  ten  stations  in  Illinois  and  two  in 
Wisconsin  x^ao.  nox  yet  started  shipping  milk.l  In  response  to  numerous  tele- 
grams of  protest,  Food  Administrator  Hoover  sent  Hr.  W.  E.  Lamb  to  Chicago  to 
investigate  tl  e claims  of  the  dairymen.  „e  called  together  the  Milk  Commissior 
to  hear  objections  from  a committee  of  the  producers.  Nothing  was  accom- 
plished by  this  meeting  as  the  majority  of  the  Commission  refused  to  change 
the  prices  ori  dnally  set  Scarcely  had  Hr.  Lamb  returned  to  Washington 
w-en  resolutions  of  protest  adoptee  by  a convention  of  the  producers  held  at 
LI  :in,  February  12,  resulted  in  hi 3 again  being  sent  to  Chicago. 

Lis  second  trip  was  more  fruitful.  After  conferring  with  the  Milk 
Commission,  .u*.  Lamb  announced  a modification  of  the  Commissions  report  and 
a new  set  of  prices. 3 Table  3 shows  the  prices  set  by  the  Commission  and 
Lamb's  modified  prices  based  upon  index  numbers  for  each  month  instead  of  upon 

*Milk  News,  Feb.,  1913,  p.  4. 

board's  Dairyman,  Mch.  8,  1918. 

3Milk  News,  Apr.,  1918,  p.  2. 


■ 

■ 


28 


Table  3.-  Comparison  of  the  Chicago  Milk  Commission  Prices,  Lamb’s 
Modified  Prices,  and  the  Prices  Received  for  Milk  in  the  Chicago  District 


Milk  Commission 
price  computations 

Lamb ' 3 price 
computations 

Prices  received 
for  milk 

191?  Nov.  

$ 3.13 

$ 3 .13 

$ 3.22 

Dec  . — 

3.20 

3.44 

3 .22 

1918  Jan, — 

3.15 

3.21 

3.22 

Feb. 

3.07 

3.15 

3.0? 

Mch. 

2.83 

2.89 

2.90 

Apr . 

2.49 

2 .85 

May  — 

2.04 

2.05 

June 

1.80 

1 .80 

T9 


the  November  index  of  177,  originally  used.  According  to  Mr.  Lamb's  com- 
putations, there  was  due  the  producers  on  March  19  21  cents  per  hundredweight 
because  of  underpayment  for  milk  during  the- preceding  months,  and  this  amount 
he  added  to  the  March  computation  of  $ 2.89,  making  the  price  $ 3 .10 . The 
pi  *c e i or  eaci.  succeeding  month  was  to  be  set  on  the  15th  of  the  month  pre- 
ceding, using  a new  index  based  upon  feed  and  labor  at  that  time.  Tills  was 
accepted  by  the  producers  but  the  manufacturers  of  condensed  milk  refused  to 
pay  anything  more  than,  the  original  prices  sot  by  the  Commission,  claiming 
that  this  was  the  only  thing  to  which  they  had  agreed.  After  several  con- 
ferences between  the  Milk  Board,  the  distributors,  and  the  manufacturers,  a 
compromise  was  effected  and  prices  were  fixed  as  follows:  March,  $ 2.90; 

April,  2 . o5 ; -ay,  5 ~ . -c;  and  June,  S 1.80.  These  prices  were  adhered 
[jO  eg  all  -ar ties  and  later  tu.e  July  price  of  $ 2.30  was  set  'ey  agreement. 

June  marked  the  end  of  the  agreement  between  the  producers  and  the 
distributors  which  had  been  entered  into  November  2,  1917.  During  the  eight 
raontns  suosequent  to  that  agreement,  milk  prices  had  been  equal  to  the  Com- 
mission prices  j.ro  two  months  only.  One  of  those  months  (February)  had  been 
marked  by  an  unorganized  milk  strike,  and  the  price  for  the  other  month  (June) 
had  been  agreed  upon  as  a compromise  with  little  reference  to  the  findings  of 
t"e  Commission.  Tne  miL.c  producers  disclaimed  all  thot  of  ever  again  refer- 
rin.g  tneir  difficulties  to  a cor.ni is s ion  and  announced  their  willingness  in  the 
future  to  meet  the  dealers  and  fix  prices,  under  the  protection  of  the  Food 
Administration,  upon  any  basis  which  would  give  them  cost  cf  production  ulus 
a fair  prof it. ^ 

Accordingly  in  June,  the  producers  and  the  dealers  met  with  Mr.  Lamb 
and  adopted  the  cost  formula  which  had  been  used  by  the  Milk  C omission  for 
distributing,  on  a percentage  oasis,  the  costs  of  producing  milk.  Under  the 
^'lilk  News,  Apr.,  1918,  g .3  . 


. 


. 


30 


new  agreement,  however,  prices  were  to  be  determined  by  applying  current  val 
ues  of  feed  and  labor  to  the  formula  without  reference  to  the  base  period  of 
prices  used  by  the  Commission. 


The  formula  adopted  was  a modification  of  the  one  presented  by 
Pearson  and  has  since  become  widely  known  as  the  "Modified  Pearson  Formula". 
Because  of  the  difficulty  of  determining  the  value  of  silage  which  has  no 
real  market,  the  183  pounds  of  silage  involved  in  the  original  formula  was 
translated  into  terms  of  hay  and  labor.  The  new  formula  then  called  for  th 
fol lowing  amounts  of  feed  and  labor  to  produce  ICO  pounds  of  milk; 

24  pounds  of  mill  feeds 
20  pounds  of  farm-raised  grain 
110  pounds  of  hay 

3 hours  of  man  labor. 


This  represented  the  average  year  cost  of  producing  milk  and  in 
order  to  obtain  the  cost  for  any  one  month,  the  percentage  differential  for 
the  corresponding  month  was  to  be  applied.  These  monthly  percentages 
were  slightly  modified  by  assuming  that  the  September  price  represented  100 
percent,  or  the  average  of  the  year.  This  gave  the  following  seasonal 
differentials: 


January 

117 

July 

85 

February 

112 

August 

95 

! larch 

105 

September 

100 

April 

S5 

October 

107 

May 

80 

November 

115 

June 

70 

December 

119 

It  was  a 

greed  that  th 

.e  average  value  of  Illinois  . 

shed  by  the  Bureau  of 

Crop  Estimates  of  the 

United 

* 


31 


of  Agriculture  should  represent  the  value  of  the  farm-raised  -rain . The 
price  of  mill  feed  was  tacen  as  the  average  wholesale  price  in  the  Chicago 
district  of  the  following  feeds:  Ajax,  Unicorn,  Sucrene,  International  Spe- 

cial Dairy  Feed,  PJQ  Dairy  Feed,  Schumacher,  gluten  feed,  hominy  feed,  brewers' 
grains , cottonseed  meal , linseed  oil  meal , bran,  and  rniddl  ing s . To  this  was 
adueu  for  the  _ irst  tnree  montns,  g 5 per  ton  to  cover  freight,  dealer's ' pro- 
fits, and  the  cost  of  hauling  the  feed  to  the  farm.  After  October,  1518,  this 
t was  increased  to  $ 7.  During  the  period  of  this  study,  a few  changes 
in  this  list  ci  mill  feeds  were  necessitated  by  the  withdrawal  of  feeds  from 
the  mar  oe t out  substitutions  were  made  so  that  the  average  price  was  unaffected 
T.  e value  o.  nay  in  tne  :ost  computations  was  taken  a3  the  average  farm  volue 
of  all  kinds  of  hay  in  Illinois  and  Wisconsin  as  quoted  by  the  Bureau  of  Crop 
icji.iifa.weo.  A laoor  rate  of  30  cents  per  hour  was  agreed  upon  and  has  been 
used  in  tne  computations  tliruout  tne  period.  These  conditions  were  acceptable 
vO  bom  the  producers  and  the  dealers,  and  this  method  of  price  determination 
was  into  effect  for  the  first  time  in  August,  1918. 

In  this  manner  was  developed  t.  e formula  cost  method  of  determining 
milk  prices  to  meet  an  emergency  created  by  tne  abnormal  conditions  arising 
ro  18  W°rl ^ bar.  That  his  method  successfully  fulfilled  the  requirements 
of  tne  time,  n&s  already  been  shown  (page  5)  but  that  it  would  l.ave  failed 
liai  i0  oeen  continued  thru  the  next  three  years  i3  evident  from  a comparison 
of  formula  and  real  prices  (Table  1 and  Fig.  1).  In  the  following  pages 
will  oe  considered  some  of  the  possible  reasons  why  the  cost  formula  could 
not  <avs  been  successfully  used  as  a milk  price  determinant  during  the  years 
follow  in  ■ t'  ,3  expiration  of  the  agreement. 


. 


32 


III . THE  DIFFERENCE  BETWEEN  THE  REAL  AND  TEE  FORMULA 
COST  OF  PRODUCING  MILK 

In  attempting  to  explain  the  economic  phenomenon  of  the  over- 
production of  milk  for  a long  period  when  milk  prices  were  much  below  the 
theoretical  cost  of  production,  the  first  and  most  obvious  explanation  sug- 
gested is  that  of  an  inaccurate  formula  for  computing  the  cost.  If  the  for- 
mula called  for  more  pounds  of  feed  and  hours  of  labor  than  were  actually  re- 
quired to  produce  100  pounds  of  milk,  it  is  quite  evident  that  milk  could  be 
produced  at  a profit  if  the  price  was  somewhat  below  the  inflated  cost  of 
production  as  computed  by  the  faulty  formula.  However,  it  must  be  remem- 
bered tint  the  original  data  upon  which  the  formula  is  based,  were  supervised 
and  collected  by  disinterested  men  who  had  been  trained  for  the  work.  Fur- 
thermore, the  original  cost  accounts  were  not  conducted  for  the  purpose  of 
obtaining  data  for  use  in  price  determination  and  it  was  not  until  two  years 
after  their  compilation  that  the  question  of  fixing  milk  prices  arose.  Hence, 
t .e  farmers  who  co-operated  with  the  Department  of  Dairy  Husbandry  in  keeping 
tnese  accounts  would  have  had  no  incentive  for  falsifying  their  records.  These 
facts,  together  wit!  the  corroborating  data  of  the  other  investigators  who 
studied  the  cost  of  producing  milk  under  like  conditions,  justify  the  conclu- 
sion that  tne  formula  used  in  determining  ilk  prices  was  approximately  cor- 
rect as  regards  the  average  amounts  of  feed  and  labor  required  for  the  pro- 
duction of  100  pounds  of  milk.  Such  a conclusion,  however,  does  not  preclude 
criticism  of  both  the  formula  and  the  method  of  its  application. 


. 


I . 


33 


Individual  Costs  Vary  From  the  Average  Cost 

One  of  the  chief  defects  of  the  "Modified  Pearson  Formula"  is  the 
fact  that  it  is  "based  upon  the  average  cost  of  production.  In  the  original 
studyl,  all  costs  of  production,  whether  in  values  or  in  units  of  commodities , 
were  simple  arithmetical  means  of  the  costs  on  all  of  the  farms,  and  the  for- 
mula derived  from  these  data  assumes  that  milk  prices  can  he  successfully  de- 
termined upon  the  basis  of  such  average  costs.  In  practice,  however,  the 
cost  of  producing  milk  may  vary  widely  on  different  farms  in  the  same  locality 
In  fact,  the  cost  of  producing  milk  on  the  33  farms  involved  in  Pearson’s 
study  ranged  from  $ 1.21  to  $ 3.11  per  100  pounds.  This  variation  was  due 
in  part  to  seasonal  production.  Milk  can  he  produced  in  tie  summer  months 
at  much  lower  cost  than  during  the  winter  because  of  the  cheap  feed  furnished 
oy  summer  pastures  and  because  of  the  .greater  amount  of  lacor  required  during 
the  winter.  Some  of  the  farms  studied  practiced  summer  dairying;  others  cen- 
tered the  bulk  of  the  year's  production  in  the  winter  months;  while  a few  pro- 
duced a uniform  amount  during  the  entire  year.  These  seasonal  differences 
in  the  :ost  of  producing  milk  on  the  different  farms  do  not  introduce  errors 
in  the  formula  based  upon  average  costs  for  the  whole  group,  provided  the  sea- 
sonal differentials  applied  to  the  computed  year  cost  have  been  correctly 
selected  to  compensate  for  the  variations.  However,  not  all  of  the  varia- 
tions in  the  cost  of  producing  milk  are  due  to  seasonal  production  and  these 
other  factors  are  the  ones  which  interfere  with  the  successful  application  of 
cost  formulas  in  determining  milk  prices. 

■^Pearson,  F.  A.,  The  Co3t  of  Milk  Production,  111.  Agr . Exp.  Sta. 


Eul.  213,  1919. 


' 


■ 

. 


: ■ ’u  > V S 


. 


34 


A study  of  the  principal  factors  causin''-  variation  in  the  cost  of 
producin’  milk  shows  the  wide  range  in  cost  which  is  possible.  Some  of  these 
factors  affect  the  unit  requirements  of  producing  milk,  while  others  affect 
only  values.  A few  affect  both  unit  requirements  and  values.  Chief  among 
these  is  the  variation  in  the  amount  of  milk  produced  annually  by  a cow.  This 
affects  three  items  of  expense:  (l)  housing,  (2)  labor,  and  (3)  feed. 

It  is  quite  evident  that  the  expense  of  housing  a high  producing  cow 
is  the  same  as  that  of  housing  a low  producing  cow.  Hence , the  cost  per 
100  pounds  of  milk  decreases  as  the  production  per  cow  increases.  This  item 
of  cost  is  a minor  one  and  amounted  to  less  than  four  percent  of  the  total 
cost  on  the  farms  studied  by  Pearson  but  it  illustrates  the  danger  of  the 
generalization  that  ti  e minor  costs  of  producing  milk  equal  the  returns  not 
milk  'page  18).  Altho  this  may  hold  true  for  the  average  of  a -/rout)  of  farms, 
it  may  be  seen  that  on  farms  with  a housin'  cost  lower  than  the  average,  the 
returns  not  mil  It  may  be  larger  than  the  miscellaneous  costs  and  therefore 
these  dairymen  would  get  a profit  which  hoes  not  appear  in  the  formula  price. 
Such  a profit  would  necessarily  be  small  but  milk  is  produced  upon  a very 
narrow  margin  and  even  this  difference  mi  -i  t be  great  enough  to  induce  a farmer 
to  continue  dairying  when  a formula  cost  of  production  would  indicate  that  he 
was  selling  his  milk  at  a loss. 

There  is  also  a negative  correlation  between  the  annual  production 
of  milk  per  cow  and  the  labor  requirement  per  100  pounds  of  milk.  Slightly 
more  labor  is  required  in  milking  and  caring  for  a high  producing  cow  than  is 
required  for  a poor  cow  but  the  increase  is  not  proportional  to  the  increased 
mil’.':  yield  so  that  the  requirement  per  100  pounds  of  milk  is  appreciably  less 
for  the  better  cows . Hence,  altho  the  formula  calls  for  a fixed  amount  of 
labor  per  hundredweight  of  milk  (3  hours),  a dairyman  with  a herd  of  hi  h 


. 


' 


• 

35 


producing  cows  may  be  able  to  produce  milk  with  less  than  this  amount  of  labor 
thereby  lowering  his  cost  to  a point  below  the  average. 

The  amount  of  feed  required  to  produce  ICO  pounds  of  milk  is  another 
important  item  which  is  influenced  by  the  annual  production  of  milk  per  cow. 

A recent  study!  0f  the  feed  consumed  and  the  milk  produced  by  1,605  Holstein 
cows  indicates  how  widely  the  feed  consumption  may  vary  from  the  average  re- 
quirements given  in  the  formula.  Table  4 gives  the  data  pertaining  to  the 
production  of  milk  and  fat  by  these  cows  and  to  their  feed  consumption.  By 
computing  the  total  digestible  nutrients  in  the  feed  consumed  by  the  different 
groups  it  is  possible  to  compare  the  amounts  of  feed  required  to  produce  100 
pounds  of  milk  by  cows  of  various  productivity.  In  the  case  of  these  1,605 
cov/s , the  nutrients  consumed  per  unit  of  product  and  the  annual  production 
of  milk  were  found  to  be  negatively  correlated  (-0.4180  + .0133).  Their 
relation  may  be  expressed  by  the  following  formula: 


Y-=  • '-’k  + 14  95 

where  Y = the  total  digestible  nutriexits  in  the  .feed  consumed  per  100  pounds 
of  milk  and  X = the  annual  production  of  milk  in  hundredweights.  Stated 
in  other words,  as  the  production  per  cow  increases,  the  nutrients  consumed 
per  100  pounds  of  milk  decreases  at  an  ever  decreasing  rate.  Fig.  3 3hows 
tlii'S  relation  graphically.  By  the  use  of  the  above  formula,  the  amount  of 
feed  required  to  produce  100  pounds  of  milk  by  cows  of  varying  production 
may  be  compared  with  the  requirement  for  the  average  cow  of  Pearson's  study. 
Table  5 shows  a number  of  such  computations.  Prom  these  data  it  may  be  seen 
that  a cov;  with  an  annual  production  of  10,000  pounds  requires  18  percent  less 
feed  to  produce  100  pounds  of  r.ilk  than  does  a cov/  with  an  annual  production 
equal  to  the  average  of  all  of  the  cows  on  the  35  farms  studied  by  Pearson. 


^Unpublished  data  compiled  by  the  author 


. 


. 


36 


Table  4.-  Relation  Between  the  Annual  Production  of  Milk  per 


Cow  and  the  Amount  of  Feed  Consumed 


C-rou; 

p Production 
of  milk  per 
cow  per  annum 

1 

Number  Average 

Feed  consumed  annually 

per  cow 

per  cow 

Concentrate 

5 s Succulen 
roughage 

t Fry 

roughage 

Pounds 

Pounds 

Pounds 

Pounds 

Pounds 

I 

2,500-3,500 

21 

3,081 

746 

5,318 

1,500 

II 

3,500-4,500 

79 

4,094 

1,050 

5,764 

1,498 

III 

4,500-5,500 

183 

5,065 

1,352 

5,925 

1,783 

IV 

5,500-6,500 

254 

6,032 

1,562 

5,279 

1,997 

V 

6,500-7,500 

309 

7,013 

1,767 

6,494 

2,167 

VI 

7,500-8,500 

266 

7,972 

1,993 

6,744 

2,280 

VII 

8,500-9,500 

221 

8,956 

2,230 

6,762 

2,311 

VIII 

9,500-10,500 

137 

9,938 

2,564 

6,748 

2,365 

IX 

10,500-11,500 

76 

10,921 

2,829 

6,684 

2,184 

X 

11,500-12,500 

33 

11,943 

3,117 

6,139 

2,054 

XI 

12,500-13,500 

19 

12,864 

3 , 769 

6,600 

2,522 

XII 

13,500-14,500 

4 

13,710 

2,989 

4,456 

2,399 

XIII 

14,500-15,500 

1 

15,389 

4,386 

8,464 

1,924 

XIV 

15,500-16,500 

1 

15,825 

4,985 

11,869 

3,561 

XV 

16,500-17,500 

1 

16,711 

4,261 

5,849 

2,089 

Tota / Digestible  Mutrienl$  per  100  Pounds  oPPU/k 


38 


Table  5.-  Relative  Amounts  of  Reed.  Required  to  Produce  IOC  Pounds 
of  Milk  by  Cows  of  Various  Productivity 


Annual  production 
of  milk  per  cow 

Relative  amounts  of 
nutrients  consumed 
per  cwt . of  milk 

Pounds 

Percent 

3,000 

137 

4,000 

123 

5,000 

112 

6,000 

104 

6,511^) 

100 

7,000 

S7 

8,000 

91 

9,000 

86 

10,000 

82 

^ Average  production  of  the  cows  on  the  farms  from  which  the 


data  were  obtained  for  the  cost  formula. 


. 


. 


39 


On  the  other  hand,  a cow  which  produces  only  3,000  pounds  of  milk  annually 
requires  37  percent  more  feed  per  hundredweight  than  the  average  cow  upon 
which  the  formula  is  based.  These  data  indicate  the  wide  range  in  feed  cost 
due  to  the  variation  in  the  annual  production  of  milk  per  cow. 

Overhead  or  fixed  expense  in  dairying  has  already  been  considered 
in  connection  with  the  variation  in  the  cost  of  milk  production  due  to  high 
and  low  producin’:  cows,  but  in  the  previous  discussion  it  was  assumed  that 
the  investment  per  cow  in  buildirw  s and  equipment  was  uniform  on  the  different 
farms.  Such,  however , is  not  the  case.  Some  of  the  farms  on  which  milk  is  . 
produced  for  the  Chicago  market  are  improved  with  large  well-built  barns  hav- 
ing modern  equipment  in  the  way  of  steel  stanchions  and  mangers,  individual 
watering  cups,  litter  carriers,  and  ventilating  systems.  All  of  these  things 
tend  for  convenience  in  taring  for  the  cows  but  on  many  farms  the  barn  and 
equipment  may  represent  an  investment  of  five  or  six  thousand  dollars.  Inter- 
est upon  this  investment  and  depreciation  of  the  buildings  make  a comparative- 
ly large  item  of  expense  in  producing  milk  on  these  farms . 

Upon  other  dairy  farms  in  the  same  locality  cow  barns  are  little 
more  than  shelters  for  the  cattle  and  represent  an  investment  of  but  a few 
hundred  dollars.  The  depreciation  of  these  buildings  ana  the  interest  on 
the  capital  invested  in  them  constitute  but  a very  small  part  of  the  cost  of 
producin  : milk. 

The  difference  in  the  cost  of  housing  cows  in  these  two  classes  of 
buildings  may  be  illustrated  by  two  dairy  farms  in  DuPage  County,  Illinois.^ 

On  one  of  these  farms  the  barn  was  of  the  type  commonly  found  on  the  best 
dairy  farms  in  that  re  ~ior.  and  the  cost  of  housing  a cow  for  one  year  amounted 
to  S 17,13.  Within  one  and  one-half  miles  of  this  farm  was  another  dairy  with 


^Cost  Acct.  I 3 334  and  3 15 , Dept,  of  Dairy  Eusb  . ,Univ.  of  111. 


1 


40 


a very  small  investment  in  buildings.  The  cost  of  housin'-  a cow  for  one 
year  on  this  farm  was  only  $ 2.10,  or  less  than  one-e i ght?  of  the  cost  on 
the  neighboring  farm.  neither  of  these  dairies  represented  the  extremes  of 
investment  in  buildings.  The  one  with  the  low  housing  cost  complied  fully 
with  the  Chicago  health  regulations  regarding  dairy  buildings,  and  the  one 
with  the  high  cost  was  being  operated  as  a practical  dairy  farm  and  should 
not  be  confused  with  the  so-called  "millionaire  far.,."  which  is  rarely  operat- 
ed at  a profit.  Between  these  two  classes  of  farms,  are  dairies'  showing  all 
gradations  of  housing  costs,  each  of  which  affects  the  cost  cf  producing  milk, 

Another  item  of  cost  in  the  production  of  milk  which  may  be  consid- 
ered as  overhead  expense  is  interest  on  the  capital  invested  in  the  cattle. 

In  the  case  of  grade  cows,  this  does  net  cause  variation  in  the  cost  cf  pro- 
ducing milk  because  the  value  of  grade  cows  is  determined  by  the  profit  they 
will  return,  measured  in  part  by  the  production  of  the  cows . Therefore,  al- 
tho  one  dairyman  may  own  a herd  of  cows  which  is  twice  as  valuable  as  his 
neighbor's  herd,  the  greater  interest  charge  is  approximately  balanced  by  the 
increased  profit  d e to  the  lower  cost  of  reduction. 

The  value  cf  a herd  of  good  pure  bred  cattle  is  much  greater  than 
the  value  of  a grade  herd  and  it  may  seem  that  interest  on  the  larger  invest- 
ment would,  in  this  case,  affect  the  co3t  of  producing  milk.  However,  the 

appreciation  in  value  of  young  stock  ana  the  3ale  of  calves  would  be  greater 
for  the  pure  bred  cattle  and  this  credit  would  be  balanced  against  the  miscel- 
lan  . in;  milk  and  the  formula  would  tb  srefor  . 

Hence,  it  may  be  concluded  that  variation  in  the  interest  due  to  different 
amounts  of  capital  be  in  * invested  in  the  cattle  does  not  introduce  any  appre- 


ciable error  in  a formula  which  is  based  upon  average  costs. 


■ 


41 


In  addition  to  the  33  two  important  factors  (production  per  cow  and 
overhead  expense)  which  cause  variation  in  the  cost  of  producing  milk  on 
different  farms,  there  are  numerous  other  causes  of  a minor  character  which 
have  similar  effects.  Among  these  variable  factors  maybe  mentioned:  dis- 
tance of  the  farm  from  the  plant  or  the  shippin-  station;  the  farmers’  ability 
as  feeders  to  obtain  a large  milk  yield  economically;  economies  in  buying 
feed  thru  car-lot  purchases  by  operators  of  large  dairy  farms;  saving  in  labor 
resulting  from  the  use  of  milking  machines;  losses  fro:;':  disease,  especially 
from  tuberculosis  and  abortion;  special  markets  for  surplus  youn  stock  from 
pure  bred  herds;  etc. 

All  of  these  factors  tend  to  divide  dairymen  into  two  classes.  One 
group  includes  the  farmers  who  are  producing:  milk  at  a cost  below  the  average 
of  the  entire  district,  and  the  other  group  includes  those  who  are  producing 
at  a cost  above  the  average.  The  latter  group,  or  high  cost  producers,  will 
be  discussed  in  Chapter  IY  in  which  are  considered  the  reasons  for  the  con- 
tinued production  of  milk  when  prices  are  below  the  actual  as  well  as  the  theo- 
retical cost  of  production. 

The  relation  of  the  first  group, or  low  cost  producers,  to  tie  formula 
method  of  determinir  g mil':  prices  may  be  shown  by  a.  hypothetical  case  . Let 
it  be  assumed  that  milk  prices  in  a dairy  district  supplying  a certain  city 
are  to  be  fixed  by  the  application  of  a cost  formula  which  correctly  measures 
the  average  cost  of  producing  milk  in  that  region.  The  better  dairymen  with 
a cost  of  production  below  the  formula  price  are  now  making  a profit,  the  mag- 
nitude of  which  is  determined  by  t eir  efficiency.  The  poorer  dairymen  with 
a co 3 1 above  t c formula  price  are  losing  money  and  it  mi  ht  be  supposed 'that 
they  would,  forsake  dairying  for  a more  profitable  enterprise.  For  various 
reasons  which  will  be  discussed  later,  they  continue  the  production  of  milk 


✓ 


42 


at  an  actual  loss,  and  a part  of  the  city’s  supply  is  therefore  still  obtained 
from  this  group.  The  efficient  dairymen  finding  milk  production  profitable, 
attempt  to  enlarge  their  profits  by  purchas in  or  raisin  more  cows  and  by  in- 
creaain  • the  production  of  those  already  owned  by  heavier  feeding  or  per bar sx 
by  increasing  tie  frequency  of  milking  from  two  to  three  times  a day.  Since 
the  amount  of  lev/  cost  milk  has  been  increased,  the  average  cost  for  tie  en- 
tire district  is  now  lower  than  the  average  at  the  time  the  formula  was  adopted 
'The  agreement  for  fix  in--:  milk  prices  on  the  formula  basis  does  not  pro- 
vide that  the  people  in  the  city  shall  consume  all  of  the  milk  produced,  and 
as  the  distributors  mu3t  pay  the  old  average  cost  of  production,  they  cannot 
lower  retail  prices  to  stimulate  consumption.  The  result  is  a surplus  of  milk 
which  must  be  manufactured  at  a loss  by  the  dealers  or  be  disposed  of  in  some 

marine r by  the  pr o due e r s . If  tu3  dealers  tabe  care  of  the  surplus,  they  cannot 

Ion  - pay  ire  formula  price  ana  remain  in  business  except  by  increasing  the  re- 
tail price  of  milk  which  would  curtail  consumption  and  result  in  a still  great- 
er surplus.  If  the  producer  takes  care  of  the  surplus  at  a loss,  he  is  not 

receiving  "tAe  formula  cost  of  production.  In  either  event,  the  cost  met!  ' 

of  fixing  milk  prices  has  failed,  even  with  this  hypothetical  case  in  which  it 

S 

v/as  assumed  that  the  formula  correctly  measured  t e average  cost  of  milk  pro- 
duction. 


From  the  fore  coin  - discussion  it  may  be  seen  that  not  only  does  the 
cost  of  producing  milk  vary  on  different  farms,  but  that  the  average  cost 
fluctuates  also,  according  to  the  proportionate  amounts  of  milk  produced  by 
the  more  off relent  and  by  the  poorer  dairymen . Furthermore,  it  appears  that 
witn  a fixed  price  for  milk,  the  new  average  will  in  all  probability  be  lower 


than  tie  old. 


' 


43 


Tile  Proportion  of  Purchased  and  Farm- :r  own  Concentrates  Fed  to 
Dairy  Cattle  Varies  Under  Different  Conditions 

The  proportion  of  farm- grown  and  purchased  feeds  in  the  concentrate 
part  of  the  cost  formula  was  based  upon  the  proportionate  amounts  fed  on  the 
36  farms  in  Pearson's  study  (45  percent  farm-grown  and  55  percent  purchased). 
Purin  tiie  period  of  ris  study  (1914  to  1916),  a normal  relationship  existed 
between  the  prices  of  farm-grown  grains  and  purchased  feeds  (Fig.  2).  After 
that  time,  however,  the  two  classes  of  feeds  were  unequally  affected  by  the 
factors  determining  prices  and  the  result  was  a widely  varying  spread  between 
the  two  price  levels.  For  instance,  it  was  shown  (page  14)  that  during  the 
fall  of  1917,  corn  prices  had  advanced  201  percent  over  the  pre-war  neriod 
althc  mill  feeds  had  increased  but  71  percent.  Fran  conditions  such  as  these 
prevail,  dairymen  find  it  profitable  to  3ell  their  corn  and  to  but  mill  feeds, 
thereby  changing  the  proportion  of  farm- grown  and  -purchased  feeds  normally 
usee..  This  suggests  the  possibility  of  producing  milk  at  a cost  somewhat 
below  the  formula  price  since  the  latter  is  based  upon  a fixed  proportion 
(approximately  equal  parts)  of  purchased  and  farm  grown  feeds.  In  other 
words, if  dairymen  use  a greater  proportion  of  the  cheaper  feed,  the  real  cost 
of  producing  milk  is  less  than  the  theoretical  cost. 

This  is  what  actually  occurred  during  the  last  fourteen  months  of 
the  period  covered  by  this  study.  The  prices  of  all  kinds  of  feeds  declined 
but  the  price  of  corn  fell  at  a much  more  rapid  rate  than  mill  feeds,  and  the 
result  was  an  abnormal  price  relation  which  was  just  the  reverse  of  the  one 
wnich  occurred  in  1917  when  the  price  of  corn  was  relatively  much  higher  than 
the  price  of  mill  feeds. 

Table  C and  Fig,  4 show  the  ratio  between  mill  feed  and  corn  prices. 


■ 

. 


. 


44 


Table  6.-  The  Ratio  of  Corn  and  Mill  Feed  Prices  ^ 

Corn  price  = 100  percent 


Year 

1918 

1919 

1920 

1921 

Jan.  — 

— 

134 

149 

185 

Eeb  . - 

138 

142 

182 

Mch . — 

— 

137 

138 

180 

Apr . — 

— 

125 

132 

177 

May  

— 

114 

127 

178 

June  — 

— 

107 

115 

163 

July  

112 

110 

171 

i 

i 

i 

i 

i 

i 

i 

W) 

115 

127 

176 

Sept.  

105 

110 

120 

194 

Oct.  

116 

135 

130 

197 

Nov . 

133 

152 

176 

257 

Dec . — 

130 

153 

196 

255 

^ Corn  prices  are  t e average  of  Illinois  and  Wisconsin  farm  prices 
from  the  U.S.D.A.  Bur.  of  Crop  Estimates. 

Mill  feeds  are  the  average  wholesale  prices  of  fourteen  feeds  from 
tie  Western  Peed  Market  Bureau  and  from  ffa.nufactu.rer 1 s quotations. 


/K 


Oct ■ Jan  Apr-  July  Oct  Jan  Apr-  July  Oct-  Jan  f\pr  July  Oct 

1918 — » * !$(9 > < 1910 > < 19ZI 


46 


From  September,  1918,  to  October,  1920,  the  average  price  of  the  fourteen 
mill  feeds  U3ed  in  the  formula  price  computations  was  24  percent  neater  than 
the  value  of  corn.  The  192C  corn  crop,  however,  acid  at  such  low  prices 
that  altho  mill  feeds  continued  to  decline,  the  average  cost  of  the  fourteen 
feeds  was  about  80  percent  greater  than  the  value  of  corn.  This  spread  was 
increased  to  150  percent  by  the  decline  in  corn  prices  attending  the  harvest 
of  the  1S21  crop. 

In  Table  7 and  in  Fig.  4 also,  is  shown  in  the  form  of  percentages, 
the  ratio  between  the  formula  cost  of  producing  milk  and  the  price  received 
by  the  farmers.  A comparison  of  this  ratio  with  the  mill  feed  and  corn  ratio 
indicates  that  the  proportion  of  farm-  Town  and  purchased  feeds  varied  with 
the  relative  prices  of  the  two  classes  of  feeds.  In  other  words,  since  a 
surplus  of  milk  was  produced  when  milk  prices  v/ere  below  the  formula  cost  of 
production,  it  may  be  concluded  from  the  correlation  of  the  two  ratios  shown 
in  Fig.  4,  that  the  real  cost  of  producing  milk  followed  corn  prices  more 
closely  than  it  did  mill  feed  prices  and  this  was  possible  only  if  a Treater 
proportion  of  farm-grown  .rains  was  fed. 

V/ere  it  not  for  the  fact  that  the  cost  accounting  studies  on  most 
of  tue  farms  involved  in  Pearson's  study  were  discontinued  before  this  period 
of  abnormal  price  relations,  it  would  be  possible  to  compare  the  amounts  of 
farm-grown  and  purchased  feeds  used  during  the  period  under  consideration, 
with  the  proportion  called  for  by  the  formula.  However,  records  are  avail- 
able on  three  of  the  farms  and  Table  8 shows  the  changes  in  feeding  practice 
which  occurred  on  these  farms  during  the  period  of  relatively  high-priced 
mill  feeds.  Each  of  the  three  fanners  decreased  the  pi’oportion  of  purchased 
feeds  as  the  price  of  mill'  feeds  became  relatively  much  greater  than  the  price 
o.  fare- grown  feeus.  Altho  the  number  of  records  is  too  limited  to  draw  anv 


' 


■ 


47 


Table  ?.-  The  Ratio  of  Formula  Costs  and  Milk  Prices 
lMilk  price  = 100  percent 


Year 

1918 

1919 

1920 

1921 

Jan.  — 

101 

109 

150 

Feb . 

— 

107 

116 

147 

Mch . 

— 

114 

134 

133 

Apr . — 

— 

108 

130 

114 

3 

1 

1 

1 

1 

1 

I 

g 

— 

106 

111 

195 

June 

— 

97 

100 

90 

July  — 

— 

99 

110 

108 

& 

0<J 

1 

1 

1 

1 

1 

1 

1 

— 

93 

105 

105 

Sept.  * — 

100 

99 

107 

171 

Oct.  — -- 

100 

106 

114 

162 

Nov.  

100 

108 

138 

lGo^2) 

Dec . 

100 

107 

153 

164^2^ 

•‘•Prices  received  by  the  producers. 

^Estimated  because  the  November  and  December  milk  was  only  partly 
paid  for  by  the  Marketing  Company.  The  ratio  given  represents  dealers'  pric 
less  10  percent. 


. 


. 


Table  8.-  Relative  Amounts  of  Purchased.  Concentrates  Fed.  to 
Dairy  Cattle  on  Three  Farms  During  the  Years  Following  the  Development  of 
the  Cost  of  Production  Formula^ 

Percentage  of  total  concentrates  fed  to  dairy  cattle 


Farm 

number 

Pearson's  study 
1914-1916 

1218 

1212 

1920 

1921 

S-12 

80 

77 

65 

65 

60 

S-10 

38 

33 

33 

20 

10 

J-l 

35 

18 

10 

16 

9 

Average 

51 

43 

3S 

34 

26 

^•Cost  account  records,  Dept,  of  Dairy  Kush.,  Univ.  of  111. 


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03 


■ 


: 


. 


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51 


Jan  Feb-  Fjck  Apr-  Flay  June  July  Aug-  Sept-  Oct  No*-  Dec- 


I 


52 


cent  of  the  average  year  price  for  the  same  period,  at  no  time  during  the  ten 
years  was  the  December  price  119  percent  of  that  specific  year's  price.  In- 
stead it  ranged  from  107  percent  to  132  percent  for  the  different  years.  The 
other  months  showed  similar  variations  thru  the  ten-year  period,  the  extreme 
range  for  any  one  month  be  in  ••  30  percent  for  both  January  and  February.  In 
Table  9 is  shown  the  monthly  variation  of  prices  fro  . the  yearly  average.  Four 
of  the  months  (March,  June,  July,  and  December)  have  been  selected  for  illustra 
tion  and  the  variation  for  these  months  is  shown  yaphically  in  Fig.  6. 

It  is  evident  from  the  wide  variation  of  the  different  years  from  the 
ten-year  average,  that  seasonal  costs  cannot  be  successfully  distributed  on 
any  such  basis  of  average  monthly  prices.  If  conditions  were  such  in  1^08 
that  a December  price  equivalent  to  113  percent  of  the  average  for  the  year 
was  sufficient  to  obtain  an  adequate  supply  of  milk,  and  if  the  following  year 
a December  price  equivalent  to  126  percent  of  the  average  yearly  price  was 
necessary,  it  appears  absurd  to  suppose  that  under  a formula  method  of  price 
determination,  a uniform  amount  of  milk  would  be  produced  year  after  year  if 
the  December  price  was  maintained  at  119  percent  of  the  average  year  cost. 

The  extreme  climatic  differences  in  various  years  and  the  varying  economic 
factors  affecting  dairy  markets  cause  a constant  shifting  of  the  relation  be- 
tween the  monthly  prices  which  are  necessary  to  induce  farmers  to  produce  a 
sufficient  amount  of  milk  to  supply  a comparatively  uniform  demand. 

It  will  be  noted  from  Fig.  1 that  the  greatest  difference  between  the 
formula  cost  and  the  milk  price  occurs  each  year  during  the  months  of  January, 
February,  March,  April,  and  May.  In  other  words , during  this  season  the  de- 
cline in  the  theoretical  cost  of  producing  milk  lias  a tendency  to  lag  behind 
the  decline  in  milk  prices.  The  uniformity  with  which  this  lag  is  repeated 
during  each  of  the  three  years,  1519,  1920,  and  1921,  would  indicate  that  the 


. 


53 


Table  9.-  Variation  of  Monthly  Milk  Prices  from  the  Average 
Annual  Price 


Average  price  for  each  year  = 100  percent 


Month 

1907 

1908 

1909 

1910 

1911 

1912 

1913 

1914 

1915 

1916 

Jan. 

117 

121 

112 

115 

129 

123 

106 

117 

126 

99 

Peb  . 

103 

121 

112 

112 

122 

120 

103 

109 

120 

92 

Mch. 

102 

113 

104 

102 

110 

110 

97 

103 

114 

85 

Apr . 

98 

99 

101 

96 

84 

87 

97 

94 

94 

99 

May 

75 

77 

79 

79 

71 

70 

84 

82 

78 

87 

June 

68 

70 

68 

69 

63 

66 

78 

73 

71 

75 

July 

75 

77 

76 

79 

84 

86 

90 

88 

84 

93 

Aug . 

SI 

91 

90 

83 

93 

96 

97 

94 

100 

102 

Sept . 

98 

99 

97 

93 

93 

100 

97 

94 

100 

102 

Oct. 

117 

106 

112 

112 

110 

106 

112 

112 

99 

114 

ITov . 

125 

113 

123 

125 

119 

116 

118 

117 

107 

126 

Dec  . 

125 

113 

125 

132 

122 

120 

121 

117 

107 

125 

Average 

100 

ICO 

100 

100 

100 

100 

100 

100 

100 

100 

. 


. 


causo  is  to  be  found  in  the  seasonal  differentials  which  were  not  properly 
adjusted  to  the  conditions  then  prevailing. 

In  the  foregoing  chapter  it  lias  he  an  shown  that  the  real  cost  of 
producing  milk  may  he  very  different  from  the  theoretical  cost  computed  hy 
tl  c Ter  tula  method.  It  is  conceded  that  the  formula  used  in  h e Cl  ica  -o  dis- 
trict represented  with  a fair  degree  of  accuracy  the  average  cost  of  producing 
milk  at  t'  e time  the  data  were  compiled  hut  it  would  appear  that  t?  e average 
cost  may  fluctuate  outside  the  limits  of  the  formula.  Under  the  conditions 
which  prevailed  during  1920  and  1921,  it  would  seem  that  this  fluctuating 


average  cost  was  below  the  theoretical  cost.  If  this  was  true,  it  explains 
tl  e anoraoly  of  the  over-production  of  milk  during  these  two  years  when  the 
prices  were  below  the  formula  cost  of  production.  However,  it  is  probable 

but  a partial  explanation.  . There  is  abun  svidence  that  many 
dairymen  produced  milk  at  an  actual  loss  during  this  period,  and  in  the  follow- 
ing chapter  is  discussed  the  reasons  for  the  continuation  of  dairy in  ; by  these 
losin  producers. 


56 


IV.  CAUSES  OF  THE  CONTINUATION  OF  MILK  PRODUCTION  AT  A LOSS 


Market  Conditions 


Dairymen  producing  for  the  Chicago  milk  market  are  ever  afraid  that 
tne  milk  produced  in  the  great  butter,  cheese,  and  condensing  region  adjoin- 
ing them  on  the  north,  may  be  diverted  to  the  city  and  thus  come  into  direct 
competition  with  their  milk.  That  this  is  no  idle  fear,  may  be  concluded 
from  a comparision  of  the  annual  consumption  of  milk  in  Chicago  and  the  amount 
sold  within  a reasonable  shipping  distance.  In  1919,  about  three  and  one- 
half  times  as  much  milk  as  i3  normally  consumed  in  Chicago,  was  sold  within  an 
area  bounded  by  a 33-cent  shipping  rate  for  eight-gallon  cans.^  This  amount 
included  all  milk  sold  whether  for  fluid  consumption  or  for  manufacture,  but 
it  indicates  the  enormous  quantity  of  milk  that  is  produced  near  enough  Chi- 
cago to  be  shipped  at  a cost  of  one  cent  a quart  or  les3. 

Most  of  this  milk  which  is  produced  in  that  part  of  the  zone  located 
in  Illinois  and  Indiana  is  consumed  in  fluid  form  or  is  condensed.  The  Wis- 
consin region,  however,  offers  several  alternative  markets,  chief  of  which  are: 
fluid  markets,  condenserie9 , cheese  factories,  and  creameries.  Not  all  of 
these  markets  are  available  to  every  dairyman  in  the  zone,  but  enough  men  have 
a choice  of  methods  of  disposing  of  their  milk  so  that  they  tend  to  maintain 
a normal  price  relationship  between  all  of  the  markets.  If  cheese  prices  are 
high,  some  milk  will  be  diverted  from  the  condenseries  and  the  creameries  to 
the  factories.  If  city  milk  prices  are  too  high,  milk  will  be  drawn  from  all 

of  these  sources. 




^ 1920  Census . 


I' 


. 

. 

. 

■ 

. ' 

• ' 

i 


57 


A normal  price  relationship  between  the  price 3 of  milk  for  tha3e  four 
principal  markets  does  not  mean  the  same  price  for  all.  The  difference  in  the 
season  of  production  and  the  expense  of  handling  the  various  classes  of  milk 
result  in  different  price  levels  within  the  same  region.  Normally  the  price 
of  milk  for  fluid  consumption  is  highest,  and  the  prices  of  milk  for  condensing,! 
cheese  making,  and  butter  making,  decrease  in  the  order  named. 

Before  the  beginning  of  the  World  War  our  exports  of  condensed  milk 
were  practically  negligible,  but  by  1919  the  business  had  grown  to  enormous 
proportions.  In  that  year  over  two  billion  pounds  of  milk  (approximately 
three  times  the  amount  consumed  by  Chicago)  was  exported  in  the  form  of  con- 
densed and  evaporated  milk.  Our  butter  exports  for  the  same  year  required 
the  production  of  about  one-fourth  of  that  amount  of  milk.  Milk  production 
in  the  Wisconsin  and  northern  Illinois  regions  was  greatly  stimulated  by  the 
high  prices  which  resulted.  New  condenseries  were  opened  and  the  prices  for 
condensing  milk  were  maintained  on  a par  with  Chicago  fluid  milk  prices. 

In  October,  1920,  the  market  went  to  pieces.  For  some  months  pre- 
vious to  this  time,  large  stocks  of  condensed  milk  had  been  accumulating  in 
the  warehouses  because  of  the  falling  off  of  the  export  demand.  On  September 
1,  the  total  stock  of  unsold  condensed  and  evaporated  milk  in  New  York  was 
1,062  percent  greater  than  on  the  same  day  the  year  previous.^-  Condenseries 
all  over  the  country  closed  down  or  made  large  reductions  in  the  price  paid  for 
October  milk.  In  the  Chicago  district,  part  of  this  milk  which  had  been  pro- 
duced for  condensing  came  into  direct  competition  with  the  city  supply  and, 
because  of  the  pooling  system,  that  which  was  sold  or  manufactured  by  the 
Marketing  Company,  still  further  depressed  the  prices  obtained  by  the  farmers 

■'■Monthly  Condensed  and  Evaporated  Milk  Market  Report,  13,  Sept.  28, 

1920,  U.  S.  D.  A.  Bur.  of  Markets. 


■ 


58 


who  were  selling  on  the  city  market.  To  add  to  the  general  surplus  of  milk 
in  1920,  almost  as  much  butter  was  imported  as  had  been  exported  in  1919. 

Fig.  7 which  is  adapted  from  a chart  prepared  by  the  hairy  Division  of  the 
Department  of  Agriculture,  shows  the  balance  of  trade  in  dairy  products  from 
1913  to  1921. 

The  export  market  conditions  undoubtedly  caused  city  milk  prices  to 
be  depressed  during  1920  and  1921,  and  account  to  some  extent  for  the  dif- 
ference between  the  cose  of  producing  milk  and  the  prices  obtained.  There 
still  remains  to  be  explained,  however,  the  reason  for  the  continued  production 
of  milk  at  these  low  prices  over  such  a long  period.  The  fact  that  some  milk 
is  produced  at  a loss  is  of  great  importance  in  any  method  of  price  determin- 
ation, and  a few  of  the  reasons  for  this  sub-marginal  production  will  be  dis- 
cussed here . 


Difficulty  of  Changing  the  Type  of  Farming 

A type  of  farming  once  established  in  a region  is  exceedingly  diffi- 
cult to  change.  Aside  from  conservatism,  a purely  psychological  factor  which 
causes  the  continuation  of  an  unprofitable  type  of  farming,  important  economic 
considerations  are  involved.  For  instance, if  a dairymen  in  the  Chicago  dis- 
trict contemplates  chan  gin  r to  a more  profitable  type  of  farming  because  a de- 
moralized market  doe3  not  afford  a price  for  milk  eqiial  to  it3  cost  of  pro- 
duction, he  is  confronted  with  various  problems. 

In  the  first  place,  ha  must  sell  hi3  herd  at  a sacrifice  because  the 
value  of  dairy  cattle  tends  to  rise  and  fall  with  the  profitableness  or  -un- 
profitableness of  the  dairy  industry.  Ee  knows  that  should  conditions  change 
so  that  dairying  would  again  be  profitable,  he  would  be  unable  to  buy  back 


■ 

‘ 


; 


60 


the  herd  which  he  had  built  up  thru  years  of  careful  breeding  and  selection. 
Altho  he  might  gather  together  a good  herd  by  the  purchase  of  cows  from  reli- 
able dairymen  and  breeders,  such  a course  would  be  attended  with  rish  and,  at 
best,  would  be  expensive  because,  with  dairying  on  a more  profitable  basis, 
dairy  cattle  prices  would  be  higher. 

This  factor,  which  hinders  the  free  shifting  from  dairying  to  some 
more  profitable  type  of  farming  and  back  again,  was  much  less  important  ten 
or  fifteen  years  ago  than  it  is  now.  At  that  time  it  was  a common  practice 
among  dairymen  in  the  Chicago  district  to  purchase  fresh  cows  in  the  Wisconsin 
butter  and  cheese  region,  milk  them  thru  the  greater  part  of  the  lactation 
period,  and  then  sell  them  for  slaughter.  The  purchase  price  of  the  cow  ms 
usually  only  a little  more  than  the  price  she  would  bring  for  beef,  and  by 
this  practice,  dairymen  avoided  the  expense  of  feeding  and  caring  for  dry  cows. 
In  recent  years,  however,  the  value  of  a fresh  cow  has  been  relatively  much 
greater  than  her  value  for  slaughter  and  this  has  tended  to  discourage  the  re- 
placement of  cows  that  was  formerly  practiced.  In  addition,  the  cheaper  pro- 
duction of  milk  by  high  producing  cows  has  induced  many  dairymen  to  build  up 
their  herds  by  raising  the  heifer  calves  sired  by  pure  bred  bulls.  Improve- 
ment of  a herd  by  this  method  is  slow,  and  a dairyman  who  has  built  up  a good 
herd  is  loath  to  sell  even  tho  he  may  be  producing  milk  at  a loss. 

A second  problem  which  confronts  the  dairyman  who  is  thinking  of 
selling  his  herd  is  the  question  of  maintaining  the  fertility  of  his  farm. 
Relatively  little  plant  food  is  removed  from  the  farm  by  the  sale  of  milk,  and 
if  the  manure  produced  by  dairy  cattle  is  properly  handled,  the  fertility  of 
the  soil  can  be  increased  instead  of  being  depleted  as  occurs  when  grain  farm- 
ing is  practiced.  This  factor  is  important  even  on  tenant-operated  farms 
because  3hare -renting  is  the  more  common  forra  of  land  tenure  and  the  tenant 


. 


. 


61 


is  therefore  unable  to  change  to  grain  farming  without  the  consent  of  the 
land  owner.  In  fact  this  is  true  for  practically  all  cash-rented,  farms  as 
well,  and  sane  cash-leases  go  so  far  a3  to  stipulate  that  no  roughages  shall 
be  sold  from  the  farm  and  any  grain  that  may  be  sold  must  be  replaced  with  an 
equal  amount  of  purchased  feed.l 

The  problem  of  fertility  maintenance  can  be  solved  by  substituting 
beef  cattle  and  hogs  for  dairy  cattle  but  this  assumes  that  the  feeding  of 
tnese  two  classes  cf  animals  is  more  profitable  than  dairying.  During  the 
last  two  years  of  the  period  under  consideration,  hog-feeding  was  relatively 
profitable  but  steer-feeding  was  not.  Hogs,  however,  are  least  able  to  util- 
ize the  large  amount  of  permanent  'astures  found  on  these  farms  and  this,  to 
gather  with  the  fact  that  the  soil  and  climate  are  not  particularly  favorable 
for  corn,  tends  to  prevent  dairymen  from  changing  to  hog-raising  as  the  major 
enterprise . 

The  large  investment  in  buildings  on  many  farms  has  already  been 
mentioned  and  these  expensive  barns  are  of  little  use  if  the  farmer  discon- 
tinues dairying  in  favor  of  grain  farming.  Even  if  steers  are  fed,  the  barns 
are  rarely  arranged  so  that  they  can  be  used  for  that  purpose  without  some  re- 
modelling. An  illustration  of  this  may  be  had  in  the  case  of  two  of  the  farms 
included  in  Pearson's  study  Both  of  these  farmers  discontinued  dairying 
and  started  to  feed  beef  cattle.  On  one  farm  a barn  worth  $ 2,000  was  remodel- 
led at  a cost  cf  $ 515,  and  on  the  other  farm  the  change  from  dairying  to 
steer-feeding  required  alterations  costing  $ 131  on  a barn  worth  $ 1,000.  In 

■'•Hibbard,  B.  H.,  and  Black,  J.  D.,  Farm  Leasing  Systems  in  Wisconsin, 
Wis.  Agr  . Exp.  Sta.  Research  Bui.  47,  1920. 


^Cost  Account  Records  R-l  and  R-2 , Dept,  of  Dairy  Kusb.,  Univ.  of  111. 


. 


■ 


62 


neither  case  was  the  barn  as  efficiently  utilized  as  when  it  contained  dairy 
cattle.  It  may  be  added  incidentally,  that  in  three  years  these  men  lost  a 
total  of  $ 5,675  on  the  seven  car-loads  of  steers  which  we re  fed. 

When  dairying  is  discontinued  in  favor  of  some  other  type  of  farming, 

i 

another  change  is  involved  which  is  far  more  important  than  building  altera- 
tions. The  whole  plan  of  labor  utilization  is  upset.  If  the  farmer  has 
been  practicing  winter-dairying,  it  may  mean  that  he  can  dispense  with  one  or 
more  farm  hands  during  the  winter  months,  but  with  the  advent  of  the  cropping 
season  he  cannot  do  all  the  field  work  alone.  He  is  therefore  compelled  to 
depend  upon  the  unsatisfactory  help  supplied  by  the  migratory  group  of  farm 
laborers  which  are  available  at  that  time,  or  to  pay  a good  farm  hand  during 
the  winter  when  his  labor  is  not  very  productive.  Even  if  the  farm  unit  is 
small  enough  to  be  operated  as  a dairy  by  one  man,  the  disposal  of  his  herd 
is  likely  to  mean  less  efficient  utilization  of  his  own  labor. 

These  are  but  a few  of  the  factors  which  tend  to  prevent  the  easy 
shifting  from  one  type  of  farming  to  another.  In  all,  they  are  strong  enough 
to  force  many  men  to  continue  dairying  at  an  actual  loss  even  when  they  are 
aware  of  the  fact  that  their  business  is  unprofitable.  In  addition  there 
are  many  men  producing  milk  at  a loss, year*  after  year,  who  think  that  their 
cows  are  returning  a profit.  Relatively  few  farmers  keep  even  simple  ac- 
counts and  practically  none  keep  cost  accounts.  It  is  true  that  most  small 
merchants  and  manufactures  do  little  better  than  farmers  in  so  rar  as  cost 
accounting  is  concerned,  but  should  their  losses  continue,  they  would  soon  be 
forced  out  of  business.  Many  dairymen,  on  the  other  hand,  because  of  the 
nature  of  their  business,  may  continue  to  produce  milk  at  a loss  for  a period 
of  years  and  during  that  time,  their  financial  worth  may  be  steadily  increasing, 
This  occurs  because  dairying  is  not  kept  distinct  from  the  other  productive 


' 


■ 


63 


enterprises  of  the  farm,  and  without  proper  allocation  of  costs,  it  is  natural 
that  much  confusion  should  exist  in  the  minds  of  the  operators  regarding  the 
profits  of  one  branch  of  their  business. 

Peed  Charged  at  Cost  of  Production 

The  lack  of  any  adequate  system  of  accounting  on  most  dairy  farms 
results  in  the  continuation  of  dairying  by  a large  group  of  sub-marginal 
milk  producers.  So  long  as  their  business  as  a whole  is  not  losing  money, 
these  men  are  unable  to  determine  whether  or  not  the  dairy  enterprise  is  prof- 
itable. This  is  largely  due  to  the  fact  that  there  is  a tendency  to  look 
upon  the  farm  as  a unit  in  thinking  of  the  cost  of  milk  production.  Farm- 
grown  feeds  are  fed  to  the  dairy  cattle  without  considering  whether  or  not 
greater  profit  could  be  obtained  by  selling  the  grain  or  hay.  Any  profit 
which  accrues  to  the  whole  farm  business  is  credited  to  the  dairy  cattle  be- 
cause milk  production  constitutes  the  principal  live  stock  enterprise.  In 
effect,  this  practice  is  the  same  as  the  method  of  charging  feeds  at  cost  of 
production  which  was  so  strongly  opposed  by  the  producers  at  the  Milk  Inquiry. 
Thi3  procedure  tends  to  keep  many  farmers  in  the  dairy  industry  who  would 
realize  greater  profits  from  the  sale  of  a part  or  all  of  their  crops.  The 
milk  produced  by  these  men  increases  the  supply  available  for  the  city  market 
and  therefore  depresses  the  price  to  all  the  producers. 

Over-estimation  of  the  Returns  Not  Milk 

On  many  farms,  even  where  dairying  is  viewed  as  a distinct  productive 
enterprise,  feed  alone  is  considered  in  estimating  the  cost  of  milk  production. 
This  is  due  to  the  frequently  made  statement,  that  the  value  of  the  calves 


' 


■ 


64 


and  the  man-ore  produced  by  a herd  is  equal  to  the  cost  of  labor  and  the  miscel- 
laneous items  of  expense.1  Altho  the  publicity  given  the  co3t  data  at  the 
Milk  Inquiry  tended  to  dispel  this  belief,  it  still  exists  in  the  minds  of 
many  dairymen  who  are  unfamiliar  with  the  facts  disclosed  by  cost  investiga- 
tions, or  who  disagree  with  the  conclusions  of  the  investigators . 

This  erroneous  opinion  has  developed  largely  from  over-estimating 
the  value  of  the  manure  produced  per  cow.  It  is  estimated  that  a cow  pro- 
duces twelve  to  fifteen  tons  of  manure  a year2  which  contains  approximately 
12  pounds  of  nitrogen,  3 pounds  of  phosphoric  acid,  and  9 pounds  of  potash 
per  ton. 3 At  the  average  prices  which  prevailed  during  the  four  years,  1918 
to  1921,  (nitrogen,  34.2  cents;  phosphoric  acid,  9.2  cents;  and  potash,  22.0 

cents )^,  equal  amounts  of  fertilizing  constituents  if  purchased  in  commercial 
« 

form  would  cost  $ 6.15  for  each  ton  of  manure  produced.  On  this  basis  the 
manure  produced  annually  by  a cow  would  be  worth  from  $ 74  to  $ 92. 

There  are .however,  several  errors  involved  in  this  method  of  computing 
the  value  of  manure.  In  the  first  place,  altho  a cow  produces  twelve  to 
fifteen  tons  of  manure  annually,  less  than  half  of  this  amount  is  recovered 
and  applied  to  the  fields  because  of  the  mothods  of  handling  manure  common 
to  Illinois  dairy  farms.  The  balance  is  dropped  while  the  cows  are  on  past- 
ure or  is  lost  oecause  of  rotting  or  leaching.  Since  most  of  the  pastures 

^Davis,  H.  P.,  Bossy  As  Buyer,  Board's  Dairyman,  Dec.  9,  1921,  p.  612. 

^Roberts,  I.  P.,  The  Production  and  Care  of  Farm  Manures,  Cornell  Univ. 
Agr.  Exp.  Sta.  Bui  .37,  pp.  29-42,  1891. 

Bart.  E.  B., Getting  the  Most  Profit  from  Farm  Manure,  Wis . Agr . Exp. 
Sta.  Bui.  221,  pp.  1-34,  1912. 

Duley,  F.  L.,  Handling  Farm  Manure,  Mo.,  Agr.  Exp,  Sta.  Bui.  166,  1919. 

^Henry  and  Morrison,  Feeds  and  Feeding,  p.  278. 

^an  Slyke,  L.  L.,  Changes  in  the  Composition  and  Cost  of  Fertilizers 
in  New  York  from  1914  to  1921,  N.  Y.  (Geneva)  Agr.  Exp.  Sta.  Bui.  493,  pp. 

10-11,  1922. 


* 


' 


. 


rg ' 


. 


. 

. 

. 


65 

in  the  Chicago  dairy  district  are  either  boggy  or  hilly  and  do  not  come  under 
cultivation,  the  manure  which  they  receive  has  much  less  value  than  that  which 
is  applied  to  the  tillable  land.  From  a study  of  224  dairy  farms  in  Illinois1 
it  was  found  that  the  average  amount  of  manure,  including  bedding  materials, 
recovered  and  applied  to  the  fields  was  only  6.6  loads  per  cow  per  year ,2 
approximately  one-half  of  the  estimated  production. 

The  fallacy  of  valuing  manure  at  the  cost  of  its  chief  fertilizing 
constituents  in  commercial  form,  lies  in  the  fact  that  the  purchase  of  commer- 
cial fertilizers  by  dairymen  in  the  Chicago  district  is  not  profitable  and  the 
use  of  these  fertilizers  is  unusual.  Therefore,  by  crediting  the  cows  for 
the  manure  at  commercial  fertilizer  prices,  dairymen  are  adding  to  their  cost 
of  producing  crops,  an  amount  greater  than  is  justified  by  the  increased  yield. 
The  real  value  of  manure  depends  upon  the  soil,  the  method  of  applying  the  man- 
ure, and  the  prices  of  farm  products,  and  is  therefore  difficult  to  determine."* 
It  is  evident,  however,  that  the  total  value  of  the  manure  produced  by  a cow 
is  very  much  less  than  is  estimated  by  dairymen  who  balance  all  costs  of  dairy- 
ing except  feed,  against  the  value  of  the  manure  and  the  calves. 

Confusion  of  Wages  and  Profits 

In  addition  to  the  dairymen  who  consider  the  value  of  the  manure  and 
the  calves  a satisfactory  return  for  their  labor  and  for  the  miscellaneous 
costs  of  producing  milk,  there  are  many  dairymen  who  think  of  costs  only  in 
terms  of  feed  and  cash  expenditures.  Interest  paid  at  the  bank  for  money 

^Ross,  H.  A.,  The  Production  and  Utilization  of  Manure  on  Illinois 
Dairy  Farms,  111  . Agr . Exp.  Sta.  Sul . 240,  1922. 

2A  load  weighs  about  one  ton. 

Spaarson  valued  the  manure  recovered  at  $ 1 per  load. 


.. 


V- 


1C-’  . 


j. 


* 


65 


borrowed  to  buy  feed  or  cattle  is  recognized  as  a cost  of  producing  milk  but 
interest  upon  the  invested  capital  is  not  considered  an  expense.  A veteri- 
nary fee  for  a sick  cow  is  charged  to  the  cost  of  producing  milk  but  if  the 
cow  dies,  her  death  is  looked  upon  as  one  of  the  unavoidable  risks  of  the  busi- 
ness and  is  figuratively  written  off  as  a loss.  The  cost  of  the  frequent  re- 
placement of  milk  cans  which  is  necessary  because  of  'die  rough  handling  which 

they  receive  in  shipment,  looms  large  in  the  eya3  of  these  dairymen  but  the 

depreciation  of  barns  and  silos  which  constitutes  a far  greater  expense  is 

entirely  overlooked.  It  is  to  be  expected,  therefore,  that  this  class  of 

dairymen  would  have  a somewhat  vague  conception  of  the  labor  cost  of  producing 
milk,  particularly  if  no  hired  labor  is  involved.  All  too  often,  the  dairy- 
man contributes  not  only  his  own  labor  but  also  that  of  his  wife  and  children, 
and  classes  as  pro;  it  all  income  over  tne  feed  costs  and  actual  expenditures. 
Eis  conception  of  profits,  however,  usually  includes  wages  of  labor,  managerial 
wages,  and  true  profits.  If  the  dairyman's  family  includes  several  children 
old  enough  to  help  with  the  milking  and  other  work  about  the  dairy,  his  expend- 
iture for  labor  may  be  practically  nothing  and  he  therefore  estimates  his  cost 
of  producing  milk  at  a very  low  figure. 

There  is  nothing  strange  in  the  fact  that  profits,  wages  of  labor, 
managerial  wages,  and  interest  are  often  confused  in  the  mind  of  a dairyman 
who  is  capitalist,  manager,  and  laborer,  in  one.  He  is  primarily  interested 
in  obtaining  tne  greatest  possible  income  from  all  sources  but  he  rarely  at- 
tempts to  separate  the  productive  factors  in  his  business  to  see  if  he  is  get- 
ting the  normal  return  from  each.  If  conditions  are  such  that  the  returns 
for  his  labor  are  less  than  the  wages  of  a farm  hand,  he  cannot  go  on  strike 
like  the  union  worker  because  the  capital  invested  in  his  business  is  his  own. 

As  long  as  the  adverse  conditions  exist,  he  must  continue  to  produce  milk  and 


' 


67 


to  receive  a low  wage  unless  an  alternative  type  of  farming  proves  more  profit- 
able . 

There  i3  some  question  as  to  the  soundness  of  charging  labor  at  a 
uniform  rate  thru  the  entire  year  as  was  done  in  the  formula  cost  computations. 
The  rate  used  (30  cents  per  hour)  was  the  approximate  wage,  including  per- 
quisites, received  by  farm  hands  and  appears,  therefore,  to  be  rather  a low- 
wage  for  the  somewhat  superior  grade  of  labor  furnished  by  the  farm  operator. 

On  the  other  hand,  the  operator  would  receive  little  or  nothing  for  his  labor 
during  the  winter  if  he  wa3  a grain  fanner.  With  this  fact  in  mind,  it  is 
not  surprising  that  even  a low  wage  for  the  labor  of  a dairyman  and  his  family 
seems  preferable  to  no  income  during  the  -winter  months.  The  result  is  the 
production  of  a large  amount  of  milk  during  the  winter  and  its  sale  at  prices 
which  may  not  pay  the  current  wage  for  the  labor  involved. 

Significance  of  Sub-marginal  Milk  Production 

These  factors  which  cause  the  continuation  of  milk  production  at  a 
loss  must  be  taken  into  account  in  studying  the  discrepancy  between  the  com- 
puted cost  of  production  and  the  price  received  for  milk  during  the  last  two 
years  of  the  period  studied.  It  is  probable  that  because  of  market  conditions 
during  that  time,  a much  greater  proportion  of  the  dairymen  were  producing 
milk  at  a loss  than  is  normally  the  case,  but  on  account  of  the  difficulty  of 
changing  to  a more  profitable  type  of  farming  they  were  compelled  to  continue. 
It  would  3eem,  however,  that  even  under  normal  conditions,  a very  lar^  group 
of  farmers  produce  milk  and  sell  it  at  prices  which  are  below  the  real  cost 
of  production.  This  is  due,  in  part  to  the  practical  difficulties  with  which 
they  are  confronted  if  dairying  is  discontinued,  and  in  part  to  their  ignor- 
ance of  the  real  cost  of  producing  milk. 


_ 


. 


68 


These  men  constitute  the  group  of  sub-marginal  producers  which  were 
discussed  in  connection  with  the  variation  in  the  cost  of  producing  milk 
(page  41).  The  fact  that  this  group  can  continue  dairying  at  the  expense 
of  their  other  farm  enterprises,  means  that  cost  of  production  acting  thru 
supply  does  not  determine  the  lower  limit  of  prices.  In  other  words,  the 
minimum  price  for  milk  is  determined  by  the  sub-marginal  producer  and  not  by 
the  marginal  producer.  The  number  of  these  sub-marginal  producers  varies 
under  different  conditions,  decreasing  during  periods  of  favorable  markets 
and  increasing  during  periods  of  market  demoralization  such  as  occurea  during 
the  latter  part  of  1920  and  all  of  1921.  These  fax'mers  are  justly  blamed  by 
the  more  efficient  dairymen  for  their  share  in  flooding  the  market  and  causing 
low  milk  prices  but  such  criticisms  are  of  no  avail  in  curtailing  production 
and  decreasing  the  surplus.  If  these  sub-marginal  producers  were  dairying 
intensively,  their  losses  would  soon  become  apparent,  but  most  of  them  are 
milking  but  a few  cows  and  a small  loss  may  be  more  then  covered  by  the  profits 
from  the  other  productive  enterprises.  There  is  therefore  no  possibility  of 
coffipletely  checking  this  unprofitable  production  but  the  best  interest  of  both 
the  efficient  and  the  inefficient  producers  demands  that  it  be  kept  at  a min- 
imum. 


' 


69 


V.  PRACTICABILITY  OF  FIXING  MILK  PRICES  BY  THE 
USE  OF  COST  FORMULAS 

The  idea  of  fixing  milk  prices  at  cost  of  production  plus  a fair 
profit  naturally  makes  a strong  appeal  to  dairymen  who  consider  such  a method 
to  be  nothing  more  than  economic  justice.  As  recently  as  February,  1922,  the 
use  of  the  cost  method  was  attempted  by  the  Dairymen' 3 League  Co-operative 
Association,  an  organization  of  dairymen  producing  milk  for  the  New  York  mar- 
ket.1 Prices  were  to  be  determined  by  the  use  of  the  Warren  Cost  Formula 
(page  20)  but  after  one  month's  use  it  was  found  that  the  market  conditions 
would  not  justify  the  payment  of  the  formula  prices  and  the  plan  was  temporar- 
ily abandoned. 

In  the  Chicago  district  also,  a large  group  of  dairymen  are  demanding 
that  prices  be  set  at  cost  of  production  plus  a fair  profit, 2 apparently 
believing  that  an  agreement  to  use  this  method  of  price  determination  is  all 
that  is  necessary  for  a successful  solution  of  their  marketing  problem.  These 
men  overlook  the  fact  that  during  the  last  two  or  three  years,  a great  surplus 
of  milk  was  produced  and  sold  at  prices  below  the  formula  computations.  How 
much  greater  this  surplus  would  have  been  Lad  the  prices  been  as  high  as  the 
formula  costs,  may  be  surmised.  As  has  been  shown  (Chapters  III  and  IV)  this 
over-production  of  milk  when  prices  were  below  the  computed  cost  was  due  to  two 
causes: 

1.  The  theoretical  cost,  computed  by  the  use  of  the  "formula,  was 
probably  somewhat  higher  than  the  average  cost  of  production  for  the  Chicago 
district,  and  very  much  higher  than  the  individual  costs  for  a large  proportion 
of  the  producers. 

^Hoard's  Dairyman, Feb . 10,  1922,  p.  118. 

%ilk  News,  Oct.  1921,  p.  1. 


■ 


. 

' 


' 


70 

2.  The  real  cost  of  producing  milk  on  a very  large  number  of  farms  in 
this  region  was  greater  than  the  price  received  for  milk,  but  because  of  the 
difficulty  of  changing  to  another  type  of  farming  or  because  of  ignorance  as 
to  the  real  cost  of  producing  milk,  mans'-  of  these  sub-marginal  producers  con- 
tinued dairying  at  the  expense  of  their  other  farm  enterprises. 

Should  the  cost  of  production  method  of  determining  milk  prices  again 
be  adopted  in  the  Chicago  district,  the  two  factors  just  mentioned  would  still 
exist  and  as  a result,  periods  of  over-production  would  in  all  probability 
follow’.  Even  with  a modification  of  the  formula,  no  accurate  measure  of  the 
real  cost  of  producing  milk  could  be  obtained,  particularly  as  regards  the 
seasonal  cost,  because  of  the  constantly  changing  conditions  affecting  pro- 
duction and  because  of  the  inflexibility  of  the  cost  formula  which  could  not 
well  be  changed  with  the  varying  conditions. 

Theoretically , at  least,  the  cost  of  production  method  of  determining 
milk  prices  takes  account  of  one  of  the  two  factors  (supply  and  demand)  which 
tend  to  regulate  prices.  However,  the  second  of  these  two  factors  (demand)  is 
completely  ignored  in  this  method  of  fixing  prices  and  hence  the  supply  which 
would  be  produced  might  be  entirely  out  of  proportion  to  the  consumers1  demand. 
If  the  resulting  surplus  could  be  converted  into  the  various  dairy  products 
and  the  lower  price  obtained  for  the  milk  in  this  form  be  distributed  to  the 
producers  in  the  form  of  a pool  price,  the  cost  method  of  fixing  milk  prices 
would  have  a better  chance  of  success.  This  was  the  plan  of  the  Dairymen's 
League  Co-operative  Association  but  competition,  which  prevented  the  success- 
ful use  of  the  formula  in  this  case,  would  undoubtedly  be  effective  in  other 
pooling  associations.  The  pool  price  was  necessarily  lower  than  the  fluid 
milk  price  and  in  order  to  ontain  the  higher  price,  many  dairymen  refused  to 
join  the  pooling  association  or  withdrew  from  it  if  they  were  members,  and 


. 


?1 


sold,  their  milk  direct  to  the  dealers,  thus  getting  the  benefit  of  the  higher 
price  without  bearing  their  share  of  the  surplus. 


(July,  1922)  is  in  the  midst  of  a fight  with  the  New  York  dealers  as  the  re- 
sult of  trying  to  overcome  this  condition.  By  means  of  a "preferential  pay- 
ment" contract  with  the  dealers  which  provides  for  the  payment  of  lower  prices 


their  organization.  A number  of  the  New  York  dealers  have  refused  to  sign 
the  contracts  and  are  buying  their  milk  outside  of  the  Dairymen's  League  Co- 
operative Association, 2 The  probable  outcome  of  this  fight  can  only  be  sur- 

mised but  should  the  association  win,  one  obstacle  in  the  way  of  determining 
city  milk  prices  on  the  formula  basis  will  have  been  removed.  However,  the 
difference  between  the  fluid  milk  price  and  the  pool  price  will  remain  as  a 
constant  threat  against  the  solidarity  of  the  organization,  and  should  the 
spread  become  too  wide,  it  might  result  in  the  complete  breakdown  of  the  pool- 
ing method  of  marketing  milk,  similar  to  the  breakdown  which  occvirred  in  the 


case  of  the  Milk  Producers  Co-operative  Marketing  Company  in  the  Chicago  dis- 
trict (page  9). 

It  would  appear  from  this  study  of  the  cost  formula,  that  under  our 
competitive  system  of  milk  production  and  distribution,  the  cost  of  production 
method  oi  determining  milk  prices  cannot  be  successfully  used  as  an  automatic 
price  regulator.  With  the  present  over-production  of  milk,  the  adoption  of 
such  a method  by  the  dairymen's  co-operative  association  in  the  Chicago  district 
would  be  to  invite  disaster  because  of  the  still  heavier  production  which 
would  be  stimulated  by  the  higher  prices  and  because  of  the  milk  which  would 


The  Dairymen's  League  Co-operative  Association  at  the  present  time 


to  non-members,1  the  association  is  attempting  to  force  the  "non-poolers"  into 


^Dealers'  contract,  April,  1922. 

^Dairymen's  League  News,  Apr.  7,  1922,  p,  1. 


72 


be  diverted  to  tlae  city  from  the  butter,  cheese,  and  condensing  region.  It 
is  perhaps  fortunate  for  the  dairy  industry  about  Chicago  that  the  producers' 
co-operative  organization  is  not  strong  enough  to  force  the  adoption  of  this 
method  of  fixing  milk  prices. 

Altho  the  cost  of  production  formula  has  little  to  recommend  it 
as  an  automatic  price  determinant,  it  may  serve  as  a starting  point  for  col- 
lective bargaining.  Cost  computations  show  the  general  trend  of  costs  much 
as  index  numbers  show  the  general  trend  of  prices.  They  may  therefore  give 
a somewhat  concrete  basis  for  estimating  the  price  necessary  to  induce  dairy- 
men to  produce  a sufficient  amount  of  milk  to  supply  the  market  without  flood- 
ing it.  Sound  judgment  is  necessary  on  the  part  of  both  the  producers'  re- 
presentatives and  the  dealers  in  order  to  modify  the  computed  price  so  that 
it  is  in  accord  with  the  prevailing  conditions  affecting  milk  production  and 
with  the  prices  of  other  dairy  products. 

Altho  the  cost  computations  are  sent  each  month  to  the  (Chicago)  Milk 
Producers  Association  and  to  the  Milk  Producers  Co-Operative  Marks  ting  Company, 
neither  of  these  associations  appears  to  be  effectively  functioning  as  a bar- 
gaining agent  and  the  part  that  the  formula  cost  computations  play  in  setting 
milk  prices  at  the  present  time  is  therefore  very  slight.  With  the  exception 
of  one  company  which  has  recently  made  a request  for  the  cost  of  production 
computations the  milk  dealers  have  evinced  no  interest  in  these  figures. 

If  the  formula  cost  of  production  is  to  be  used  as  a basis  for  bar- 
gaining, the  monthly  computations  should  be  given  a large  amount  of  publicity 
among  both  the  consumers  and  the  producers.  When  milk  prices  advance,  some 
decrease  in  the  amount  of  milk  consumed  is  to  be  expected  hut  this  decrease  is 
greater  than  the  price  warrants  and  is  the  result  of  a peculiar  state  of  mind 

^Letter  from  the  Richmond- Smith  Company,  Mch.  17,  1922. 


■ 


. 


; 

i 


73 


of  the  consumer,  who  feels  that  farmers  are  taking  an  unfair  advantage  by  act- 
ing collectively.  In  the  past  the  city  press  has  been  largely  responsible 
for  this  attitude  of  the  consumers  because  of  its  attacks  upon  the  producers 
who  were  often  characterized  as  "profiteers”,  "robbers",  and  "infanticides". 
More  recently,  the  problems  of  the  dairymen  have  been  better  understood  and 
the  city  newspapers  in  most  cases  have  shown  a spirit  of  fairness  in  discussing 
the  milk  situation. 

Publication  of  the  monthly  cost  of  production  computations  would  do 
much  to  overcome  the  antagonistic  attitude  of  the  consumers  when  increased 
costs  necessitate  an  advance  in  milk  prices.  If  the  consumers  feel  that  the 
price  advance  is  not  merely  the  result  of  the  producers  using  their  collective 
power  to  increase  their  profits,  there  is  less  of  a tendency  to  decrease  the 
amount  of  milk  consumed  and  the  demand  is  therefore  better  maintained. 

Wide  distribution  of  the  cost  of  production  computations  among  the 
milk  producers  at  times  when  the  formula  cost  was  above  the  milk  price,  might 
possibly  have  some  effect  in  decreasing  the  amount  of  milk  produced.  Whether 
the  sub-marginal  or  the  more  efficient  producers  would  be  most  likely  to  de- 
crease their  production,  is  a matter  of  speculation  but  the  result  in  either 
case  would  be  to  increase  milk  prices. 

It  may  therefore  be  concluded  that  the  formula  cost  of  milk  production 
may  be  valuable  as  a basis  for  collective  bargaining  and  a3  a means  of  inform- 
ing both  producers  and  consumers  as  to  the  general  trend  of  costs  but  its  use 
as  an  automatic  milk  price  determinant  is  economically  unsound. 


